1) Company, Inc. Company, Inc. is considering acquiring a new piece of equipment The new piece of equipment costs $150. The company can lease or buy. If it leases the lease does not to be capitalized, it will be a 2-year lease, and the payment will be $85 at the beginning of each year. If the company buys it can borrow the full $150 at 8% interest on the loan. Assume the tax rate at 40%. Depreciation is $75 per year. No salvage value; equipment is worth nothing after 2 years.
| Q: | Should Company, Inc. lease or buy the equipment? | |||||||
2)
| I-Banks & ACME Inc. | ||||||||||
| I-Bank specializes in underwriting new issues by small firms. | ||||||||||
| On a recent offering of ACME Inc., the terms were as follows: | ||||||||||
| Price to public | $5.50 | per share | ||||||||
| Number of shares | 1.75 | million | ||||||||
| Proceeds | $8,000,000 | |||||||||
| Out of pocket expenses incurred by I-Bank and related to ACME’s offering were $500,000. | ||||||||||
| Q: | What profit or loss would I-Bank incur if the issue were sold to the public at the following average price? | |||||||||
| Barek Company | ||||||||||
| Barek, whose stock price is now $27.50, needs to raise $27 million in common stock. | ||||||||||
| Underwriters have informed the firm’s management that they must price the new issue | ||||||||||
| to the public at $25 per share. | ||||||||||
| The underwriters’ compensation will be 6% of the issue price, so Barek will net: | 25.85 | |||||||||
| per share. The firm will also incur expenses in the amount of $200,000. | ||||||||||
| Q: | How many shares must the firm sell to net $21.5 million after underwriting and | |||||||||
| flotation expenses? | ||||||||||