Suppose a firm wants to borrow $200 million for 10 years to fund capit

Suppose a firm wants to borrow $200 million for 10 years to fund capital expenditures, and is
considering the choice of a private placement with several insurance companies or a public issue through an investment banking firm as underwriter.

For simplicity, we will assume that in either case the firm will issue pure-discount bonds. The insurance companies demand interest at a rate of 10 percent, with a 3% flotation cost, while the underwriter states that the interest cost will be 9.25% with 5% flotation costs. What is the effective cost of the loan in each case? (ANSWERS: 10.325% and 9.785%, respectively)
private public
placement issue
a. 10.325% 9.785%
b. 9.785% 10.325%
c. 8.975% 11.225%
d. 11.225% 8.975%

ANSWER

A