Instructions
Submit your answer to each of the problems and show the calculations you used to arrive at the answer. You must show calculations to receive credit.
- Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas if it goes through with the debt issuance?
- Carbon8 Corporation wants to raise $120 million in a seasoned equity offering, net of all fees. Carbon8 stock currently sells for $28.00 per share. The underwriters will require a fee of $1.25 per share, and indicate that the issue must be underpriced by 7.5%. In addition to the underwriter’s fee, the firm will incur $785,000 in legal, administrative, and other costs. How many shares must Carbon8 sell in order to raise the desired amount of capital?
- FM Foods is evaluating its cost of capital. Use the following information provided on December 31, 2017, to estimate FM’s after-tax cost of equity capital.
- Yield to maturity on long-term government bonds: 4.4%
- Yield to maturity on company long-term bonds: 6.3%
- Coupon rate on company long-term bonds: 7%
- Historical excess return on common stocks: 6.5%
- Company equity beta: 1.20
- Stock price: $40.00
- Number of shares outstanding (millions): 240
- Book value of equity (millions): $5,240
- Book value of interest-bearing debt (millions): $1,250
- Tax rate: 35.0%
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