I) You want to choose between the following types of issues:
A public issue of $10 million face value of 10-year debt. The interest rate on the debt would be 8.0%, and the debt would be issued at face value. The underwriting spread would be 1.9%, and other expenses would be $83,000.
A private placement of $10 million face value of 10-year debt. The interest rate on the private placement would be 8%, but the total issuing expenses would be only $39,000.
1. Calculate the net proceeds of public issue. (Enter your answer in dollars not in millions.)
Net proceeds of public issue= $ _____________
2. Calculate the net proceeds of private placement. (Enter your answer in dollars not in millions.)
Net proceeds of private placement= $ ___________________
II) Other things equal, which is the better deal?
Private placement
Public issue