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R.J. Reynolds International (RJR) is currently facing a decision of choosing between debt financing or equity financing of $1 Billion in its acquisition of Nabisco

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Introduction

rj reynolds international financing solution R.J. Reynolds International (RJR) is currently facing a decision of choosing between debt financing or equity financing of $1 Billion in its acquisition of Nabisco. After analyzing the various benefits of using debt financing over equity financing, we choose to issue debt. Debt financing is much cheaper than the equity or preferred stock financing. The corporate incomes used to pay for the interests of outstanding debts are tax exempt. According to the General Accepted Accounting Principle (GAAP), the taxable income is calculated by subtracting the interests by the earnings before interest and taxes (EBIT). The more accumulated interest a corporation is paying, the lower the tax bracket it would fall under. This argument can apply to issuing preferred stock as well. The preferred dividends, whether in arrears or not, are not tax exempt. ...read more.

Middle

While the Euro-market has the advantage of being less regulated, our plan to issue a dual currency Yen-dollar bond favors us issuing debt in the Japanese foreign market. Japan?s Ministry of finance has already started cracking down on Euro-market issued bonds that are brought back to Japan after issuance. They know that this is done to circumvent Japan?s new regulation which does not allow more than 10% of Japanese firm?s assets to be held in foreign securities. We do not want any investigation taking place with an issuance of this magnitude. RJR should issue a Yen-dollar dual currency bond for various reasons. First, the all in cost of the Yen-dollar dual currency appear to be lower than the Eurodollar all in costs of 12%, when adding coupon and fees. Euro-yen bonds have an all-in fee of 8 & 1/4 % for coupons and fees. ...read more.

Conclusion

RJR?s next step after deciding to issue debt, is figuring out what is the proper maturity. We had to consider the fact that we have a commitment of $1.2 billion domestic twelve year note that is being issued. RJR also, recently issued $250 million in 30 year debentures, and $250 million in of eight year notes. Seeing as to how the $1.2 billion notes and the $250 million debentures are for 12 years and 30 years of maturity, we initially thought a 20 year maturity was appropriate for the additional $1 billion financing. However the Japanese market mostly consist of 5 to 10 year bonds, because they are used as an alternative the lower coupon paying Japanese bonds with maturities of mostly 10 years. Therefore we would like to issue Yen-dollar dual currency bonds of $500 million with a maturity of 5 years , and another $500 million with a maturity of 10 years. ...read more.

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