Suppose a firm wants to borrow $200 million for 5 years to fund capita

Suppose a firm wants to borrow $200 million for 5 years to fund capital expenditures, and is
considering the choice of a bank loan 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 debt. The bank demands a 10.25% interest rate (with no fee), while the underwriter states that the interest cost will be 9.25 percent with 3% flotation costs. Which funding source provides the lower effective interest cost?
a. the bank loan
b. the public issue
c. both provide exactly the same effective interest cost

ANSWER

B