Question
ABC Ltd. considers to issue $100mil debts to fund a potential acquisition of DEF Ltd.. ABC decides to hire Macquarie Bank as their lead underwriter.
ABC Ltd. considers to issue $100mil debts to fund a potential acquisition of DEF Ltd.. ABC decides to hire Macquarie Bank as their lead underwriter. Macquarie Bank proposes three options.
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ABC can raise the capital in the Australian domestic bond market. The coupon rate is 5% p.a.. The coupon is paid semi-annually. The bond will mature in 3 years. The underwriting fees is 0.85% of the issue size.
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Alternatively, ABC can tap into the Eurobond market. The Euro-bonds also have three years to maturity. The annual coupon payment is slightly higher at 5.25% p.a. Macquarie has a reputation in this market so the underwriting fees is lower at 0.65%.
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Finally, ABC can issue two-year Dim-Sum bonds in China with a coupon rate of 5.5% paid annually. The underwriting fee is 0.75%.
Based on All-in cost method, which bond should ABC Ltd. choose? (15 marks)
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