Question 13 Kern's Kernel Corporation needs to raise $300,000 of additional capital to purchase a grain silo. The corporation could borrow $300,000 from a local bank or it could issue additional shares of common stock to a handful of additional investors in exchange for $300,000. Jen, the company's CFO, is considering relative advantages and disadvantages of both options. The corporation's existing shareholders are unwilling to sacrifice ownership and control of the enterprise. Therefore, Jen is strongly considering debt financing because a will not shares or have voting rights whereas equity investors will have both and privileges.

Question 13 Kern's Kernel Corporation needs to raise $300,000 of additional capital to purchase a grain silo. The corporation could borrow $300,000 from a local bank or it could issue additional shares of common stock to a handful of additional investors in exchange for $300,000. Jen, the company's CFO, is considering relative advantages and disadvantages of both options. The corporation's existing shareholders are unwilling to sacrifice ownership and control of the enterprise. Therefore, Jen is strongly considering debt financing because a will not shares or have voting rights whereas equity investors will have both and privileges.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Finding the WACC. Monica is the CFO of Cooking for Friends (CFF) and uses the pecking order hypothesis philosophy when she raises capital for company projects. Currently, she can borrow up to $450,000 from her bank at a rate of 7.75%, float a bond for $800,000 at a rate of 10%, or issue additional stock for $1,500,000 at a cost of 15%. What is the WACC for CFF if Monica chooses to invest A. $900,000 in new projects? B. $200,000 in new projects? C. $2,750,000 in new projects?
Suppose you are the president of a small, publicly - traded corporation. Since you believe that your firm's stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt. In this case, the appropriate marginal cost of capital for use in capital budgeting during the current year is the after-tax cost of debt. Question 2 options: True False
2. An analyst for Acme, R. Runner, has recommended that Peter the Anteater purchase shares in a private firm (a firm that is not traded on any exchange) called Dynamite Corp. Dynamite has 30% debt and 70% equity. R. Runner believes that Dynamite will generate a return of 10% over the next year. Since Y. Lee is new to the job, he decides to do a little research on his own. He finds a company, Explosions Unlimited, that has very similar business as Dynamite. Explosions has an equity beta of 1.05 and is composed of 40% debt and 60% equity. Should Peter the Anteater buy the stock? The expected return on the market is 12% and the expected risk-free rate is 5%.
Bentley Corporation and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown here: State Probability Bentley Rolls Boom .70 $ 330,000 $ 300,000 Recession .30 130,000 100,000 Bentley currently has a bond issue outstanding with a face value of $145,000. Rolls is an all-equity company.
No. 2: La Pizza della Nonna Corporation, S.A. It is in the process of selling shares in the Roman market to achieve an expansion of its business throughout the Italian nation. To do this, the president of the company, Mr. Giuseppe Pomodoro, and his wife, Ms. Alessandra Tiramisú, have hired him to help them determine the value range of the Corporation, using the discounted cash flow method. The information available for this assessment was collected by the Financial Manager, the MBA Giacomo Pizza and is detailed below:• Sales for the next three years in units: 42,750; 37,500 and 65,000.• Unit price: in euros of year 1: € 17.65• Inflation of income: according to Sales Manager Giancarlo Panetone it is 12% per year. • Cost of sales: 37.5% of sales.• Fixed operating costs are in the order of € 10,450.00 • Operating expenses: 2.75% of sales.• Cost inflation according to the Production Manager Ing. Chiara Gelatti is 9.5% per year.• The company must contribute a working capital of € 5,000.00.…
QUESTION 1: Westjet Limited is considering building a new manufacturing plant to produce wjets on the land it bought 10 years ago for $5,000,000. The land is currently appraised at 15,000,000. The construction cost of the plant will be $50,000,000. The following market data on the Westjet Limited is current: Common Stock: 2,000,000 shares, selling for $100 each; the beta is 1.5 Debt: 100,000 7% annual coupon bonds, 20 years to maturity, selling for 111.47% of par value. The bonds have $1000 par value each. 1,000,000 shares of 3.5% preferred stock outstanding, selling for $70 per share. Par value is $100 each. Preferred Stock: Expected return on the market 8%, the risk free rate of return is 3%, and the corporate tax rate is 40%. An initial investment of $10,000,000 in net working capital is required. a. Determine the weighted average cost of capital. b. The plant will have 25 years life, will be depreciated straight line, and will have zero salvage value after 25 year. Land will be…

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