A2. (Comparing Borrowing Costs) Stephens Security has two financing alternatives:

A2. (Comparing Borrowing Costs) Stephens Security has two financing alternatives:

Corporate Financial Management (3rd Edition): Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV: Chapter 20, Problems

A2 Stephens Security

A2. (Comparing borrowing costs) Stephens Security has two financing alternatives:

(1) A publicly placed $50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20-year life.

(2) A $50 million private placement with a large pension fund. Issuance costs are $500,000, the bond has a 9.25% annual coupon, and the bond has a 20-year life. Which alternative has the lower cost (annual percentage yield)? SOLUTION