Exxon Mobil has a 34% tax rate and has decided to issue $100 million of seven year debt. It has three alternatives. A U.S. public offering would require an 8% coupon with interest payable semiannually and $900,000 of floatation expense. A U.S. private placement would require an 8-3/8% coupon with interest payable semiannually and $500,000 of floatation expense. A Eurobond offering would require an 8-1/8% coupon with interest payable annually and $1,100,000 of floatation expense.
a. Calculate the after tax cost of borrowing for each alternative.
b. Which alternative has the lowest cost of borrowing?