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Dear Tutor, kindly advice/assist on how to do this calculation.
ABC Corporation management has decided to issue loan stocks to finance the expansion. The prevailing market interest rate is 7% and the management of ABC Corporation is considering the appropriate coupon rate for its loan stock. Based on the information obtained from investment bankers, the company could issue its $10 million loan stock, which is redeemable in ten years’ time, at either 9% or 5% interest rate, payable annually. The expected issued prices at the two rates are $13 million and $7.5 million, respectively.
Compute the effective annual loan interest expense for ABC Corporation under each of the two interest rate options, and recommend the interest rate option to be used.
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