Chapter 15, Problem 1P

a:

To determine

Calculate the floatation cost and number of share.

Explanation of Solution

Number of share (NS) can be calculated as follows.

$\begin{array}{c}\left(\begin{array}{l}{\text{Price}}_{\text{Share}}\left(\text{NS}\right)\\ -{\text{Price}}_{\text{Share}}\times \text{i}\times \left(\text{NS}\right)\end{array}\right)={\text{Investment}}_{\text{Required}}\\ \left(\begin{array}{l}\text{25}\left(\text{NS}\right)\\ -\text{25}\times \text{0}\text{.06}\times \left(\text{NS}\right)\end{array}\right)=\text{10,000,000}\\ \text{NS}=425,532\end{array}$

Number of share is 425,532.

Floatation cost (FC) can be calculated as follows.

$\begin{array}{c}\text{FS}={\text{Price}}_{\text{Share}}\times \text{i}\times \left(\text{NS}\right)\\ =25\times \text{0}\text{.06}\times \left(\text{425,532}\right)\\ =638,298\end{array}$

Floatation cost is $638,298.

b:

To determine

Calculate the interest payment.

Explanation of Solution

Floatation cost (FC) can be calculated as follows.

$\begin{array}{c}\text{FS}=\frac{{\text{Investment}}_{\text{Required}}}{1-{\text{Floatation cost}}_{\text{Bond}}}-{\text{Investment}}_{\text{Required}}\\ =\frac{\text{10,000,000}}{1-\text{0}\text{.019}}-\text{10,000,000}\\ =193,680\end{array}$

Floatation cost is $193,680.

Number of bond (NS) can be calculated as follows.

$\begin{array}{c}\text{NS}=\frac{\text{FS}}{\text{Par value}}\\ =\frac{10,193,680}{1,000}\\ =10,194\end{array}$

Number of bond is 425,532.

Annual interest (AI) can be calculated as follows.

$\begin{array}{c}\text{AI}=\text{NS}\times \text{Par value}\times {\text{i}}_{\text{Bond}}\\ =\text{10,194}\times 1,000\times \text{0}\text{.12}\\ =1,223,280\end{array}$

Annual interest is $1,223,280.