# Assignment

q5. The current market value of Tanus Corporation’s equity is \$90 million.  The company has 25 million outstanding sharesand will issue 5 million new shares.  The investment banker charges a 7% spread.

What is the correctly valued offer price?

How much cash will the company raise net of the spread?

What percentage of the company will new stockholders own?

What are 3 reasons that explain why a firm wants to raise new equity capital?

What are 3 reasons that explain why a firm would want to raise new capital through debt rather than equity?

Q6.Question 6.  (15 points)  Angie Corporation is evaluating whether to lease or purchase equipment.  Its tax rate is 30 percent.  If the company purchases the equipment for \$2,000,000 it will depreciate it over 4 years, using straight-line depreciation.  No salvage value is expected.  If the company enters into a 4-year lease, the lease payment is \$600,000 per year, payable at the beginning of each year.  If the company purchases the equipment it will borrow from its bank at an interest rate of 10 percent.

a.  Calculate the cost of purchasing the equipment

b.  Calculate the cost of leasing the equipment.

c.  Calculate the net advantage to leasing.  Should the company purchase or lease the equipment?

Question 7.  (15 points) Marcal Corporation is considering  a gold mining project would cost \$15 million today and generate positive cash flows of \$6 million a year at the end of each of the next 4 years.   The project’s cost of capital is 12%.

a.  Calculate the project’s NPV if the company proceeds now.

b.   The company is fairly confident about its cash flow forecast, but expects to have better price information in 1 year.  The company believes the cost would be \$18 million in  1 year.  It estimates there is a 60% change CFs will be \$9 million for 4 years and a 40% change CFs will be \$5 million for 4 years.  Should the company proceed with the project now or wait 1 year until it has better information?

c.  Apart from the calculations above, discuss 3  qualitative  factors that the company should consider when making its decision on accepting the new project.

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