A Word document or an Excel spreadsheet and show the calculations you used to arrive at the answer.
Sample Solution
Absolutely! Let's break down each problem and provide the solutions with calculations.
Problem 1: Salinas Corporation Interest Tax Shield
- Given:
- Debt issuance: $20 million
- Interest rate: 7%
- Tax rate: 40%
- Calculations:
- Annual interest expense: $20,000,000 * 0.07 = $1,400,000
- Interest tax shield: $1,400,000 * 0.40 = $560,000
- Answer: The annual interest tax shield to Salinas would be $560,000.
Problem 2: Carbon8 Corporation Seasoned Equity Offering
- Given:
- Net capital needed: $120 million
- Current stock price: $28.00 per share
- Underwriter's fee: $1.25 per share
- Underpricing: 7.5%
- Other costs: $785,000
Full Answer Section
- Calculations:
- Net price per share: $28.00 * (1 - 0.075) - $1.25 = $24.60 - $1.25 = $23.35
- Total cost other than per share cost: $785,000
- Amount needed from share sales: $120,000,000
- Number of shares: $120,000,000 / $23.35 = 5,139,186.30
- Since you can not sell a fraction of a share, you must round up.
- Answer: Carbon8 must sell 5,139,187 shares to raise the desired amount of capital.
Problem 3: FM Foods Cost of Equity Capital
- Given:
- Yield on government bonds (risk-free rate): 4.4% (0.044)
- Company long-term bond yield: 6.3% (0.063)
- Historical excess return (market risk premium): 6.5% (0.065)
- Company equity beta: 1.20
- Stock price: $40.00
- Shares outstanding: 240 million
- Book value of equity: $5,240 million
- Book value of debt: $1,250 million
- Tax rate: 35% (0.35)
- Calculations:
- Cost of equity capital (using Capital Asset Pricing Model - CAPM): Risk-free rate + (Beta * Market risk premium)
- Cost of equity: 0.044 + (1.20 * 0.065) = 0.044 + 0.078 = 0.122
- Cost of equity = 12.2%
- Answer: FM's after-tax cost of equity capital is 12.2%.
Word Document/Excel Spreadsheet:
For clarity, I recommend presenting your answers in a table format within a Word document or Excel spreadsheet, showing the givens, formulas used, and the final answers. Here's a sample of how you might structure it in a table:
Salinas Corporation
| Item | Calculation | Result |
|---|---|---|
| Debt Issuance | $20,000,000 | |
| Interest Rate | 7% | |
| Tax Rate | 40% | |
| Annual Interest Expense | $20,000,000 * 0.07 | $1,400,000 |
| Interest Tax Shield | $1,400,000 * 0.40 | $560,000 |
Carbon8 Corporation
| Item | Calculation | Result |
|---|---|---|
| Net Capital Needed | $120,000,000 | |
| Current Stock Price | $28.00 | |
| Underwriter's Fee | $1.25 | |
| Underpricing | 7.5% | |
| Other Costs | $785,000 | |
| Net Price Per Share | $28.00 * (1 - 0.075) - $1.25 | $23.35 |
| Number of Shares | $120,000,000 / $23.35 | 5,139,187 |
FM Foods
| Item | Given Value | Calculation | Result |
|---|---|---|---|
| Government Bond Yield | 4.4% | ||
| Company Long-Term Bond Yield | 6.3% | ||
| Historical Excess Return | 6.5% | ||
| Equity Beta | 1.20 | ||
| Cost of Equity (CAPM) | 0.044 + (1.20 * 0.065) | 12.2% |
By presenting your work in this organized format, you demonstrate a clear understanding of the calculations and ensure easy readability.
We are here to help
We have crazy offers
It’s quick and easy to place an order. We have an efficient customer service that works 24/7 to assist you.It’s quick and easy to place an order. We have an efficient customer service that works 24/7 to assist you.
We are here and ready to help
Ready to join our block community of business leaders for four days of virtual sessions on driving developer happiness and boosting productivity?
Order Now