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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Similar questions

A privately held corporation, is making plans for future investments that can increase growth. The company’s manager has recommended that the company “go public” by issuing common stock to raise the funds needed to support the growth. The current owners, who founded the firm, are worried that control of the firm will be diluted by this strategy. If the company undertakes an IPO, it is estimated that each share of stock will sell for $6.25, the investment banking fee will be 22 percent of the total value of the issue. The founders now hold all of the company’s stock: 8 million shares. If the company issues 8 million shares, what proportion of the stock will the founders own after the IPO?
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?
An investment bank agrees to underwrite an issue of 15 million shares of stock for Looney Landscaping Corporation. a. The investment bank underwrites the stock on a firm commitment basis, and agrees to pay $10.00 per share to Looney Landscaping Corporation for the 15 million shares of stock. The investment bank then sells those shares to the public for $11.50 per share. How much money does Looney Landscaping Corporation receive? What is the profit to the investment bank? If the investment bank can sell the shares for only $8.50, how much money does Looney Landscaping Corporation receive? What is the profit to the investment bank? b. Suppose, instead, that the investment bank agrees to underwrite the 15 million shares on a best efforts basis. The investment bank is able to sell 13.5 million shares for $10.00 per share, and it charges Looney Landscaping Corporation $0.325 per share sold. How much money does Looney Landscaping Corporation receive? What is the profit to the investment…
Galaxy Corporation is proposing a recapitalization that would increase its debt level and interest cost. The company will sell new bonds and repurchase shares of its common stock with the proceeds. According to the company's CFO, the initiative will not affect net assets or operating profits, but it will raise earnings per share (EPS). Which of the following statements is CORRECT, assuming the CFO's calculations are correct? * Since the proposed plan raises Galaxy's financial risk, the company's stock price can fall even if EPS rises. More bonds will be issued under the plan, increasing their liquidity and, as a result, lowering the interest rate on the bonds that are currently outstanding. Since the plan is expected to raise EPS, net income is also expected to grow. If the strategy succeeds in increasing EPS, the stock price would rise at the same rate. If the plan decreases the WACC, the stock price is likely to fall as well.
Question 3 a) Suppose you own stock in a company. The current price per share is $25. Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding stock. Your company's management immediately begins fighting off this hostile bid. Is management acting in the shareholders' best interests? Why or why not? b) Briefly discuss principal - agent problems as related to a corporation. c) What items of good corporate governance serve to mitigate the tension between owners and managers?
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%.
H7. Lois Kenseth, president of Sycamore Corporation, is concerned about several large stockholders who have been very vocal lately in their criticisms of her leadership. She thinks they might mount a campaign to have her removed as the corporation's CEO. She decides that buying them out by purchasing their shares could eliminate them as opponents, and she is confident they would accept a “good” offer. Kenseth knows the corporation's cash position is decent, so it has the cash to complete the transaction. She also knows the purchase of these shares will increase earnings per share, which should make other investors quite happy. (Earnings per share is calculated by dividing net income available for the common shareholders by the weighted-average number of shares outstanding. Therefore, if the number of shares outstanding is decreased by purchasing treasury shares, earnings per share increases.) (a) Who are the stakeholders in this situation? (b) What are the ethical issues involved?…
Jiffy Wax Corp. can sell common stock for $ 15 per share and its investors require a 14% return. However, the administrative or flotation costs associated with selling the stock amount to $ 2.40 per share. What is the cost of capital for Jiffy Wax if the corporation raises money by selling common stock? Select one: a. 14.00% b. 21.50% C 30.00% d. 16.67%
D3.
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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