Question
The alternative is a traditional 20 year bond that will pay 4% interest with semi annual interest payments of 2% of the amount owed. The
The alternative is a traditional 20 year bond that will pay 4% interest with semi annual interest payments of 2% of the amount owed. The principal ($350 million) will be due at the end of 20 years.The bond will be sold to mutual funds and life insurance companies.If Mc Cormick takes this alternative, it will owe Goldman Sachs a fee of 9/10 of 1% of the $350 million.This fee will be deducted from the initial proceeds of the bond sale.McCormick CFO would like to know which financing will cost less.To evaluate financing, Mc Cormick uses the current cost of debt which is 4% as the annual discount rate.Use the PV function.Make the $350 principal payment in year 20 a positive number to show it as a cost today.Calculate the Goldman fee as a cost today (time zero).Negative numbers are costs today.Use 4% divided by 2 (2%) as the semi annual discount rate.Use 40 periods.
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