20. The market value of the marketing research firm Fax Facts is $500 million. The firm issues an additional $150 million of stock, but as a result the stock price falls by 3%. What is the cost of the price drop to existing shareholders as a fraction of the funds raised? (Enter your answer in millions.)

   Cost of the price drop        $    million

 

 

22. You need to choose between the following types of issues:

   – A public issue of $10 million face value of 10-year debt. The interest rate on    the debt would be 10.5%, and the debt would be issued at face value. The underwriting spread would be 1.9%, and other expenses would be $78,000.

   – A private placement of $10 million face value of 10-year debt. The interest      rate on the private placement would be 11.0%, but the total issuing expenses         would be only $34,000.

  

   a-1. Calculate the net proceeds of public issue. (Enter your answer in          dollars not in millions.)

      Net proceeds of public issue       $    

   a-1. Calculate the net proceeds of private placement. (Enter your answer in dollars not in millions.)

      Net proceeds of private placement       $    

 

   b. Other things equal, which is the better deal? 

   Public issue or Private Placement

 

23. Pandora, Inc., makes a rights issue at a subscription price of $8 a share. One new share can be purchased for every eight shares held. Before the issue there were 12 million shares outstanding and the share price was $11.

 

   a. What is the total amount of new money raised? (Enter your answer in    millions rounded to 1 decimal place.)

      New money raised$    million

 

   b. What is the expected stock price after the rights are issued? (Round your   answer to 2 decimal places.)

      New share price      $    

 

24. Establishment Industries borrows $850 million at an interest rate of 8.0%. It expects to maintain this debt level into the far future. What is the present value of interest tax shields? Establishment will pay tax at an effective rate of 30%. (Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.)

   PV (tax shield)        $    million

 

 

25. The common stock and debt of Northern Sludge are valued at $70 million and $30 million, respectively. Investors currently require a 16.0% return on the common stock and a 7.7% return on the debt. If Northern Sludge issues an additional $13 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

   New return on equity              %

 

26. A firm currently has a debt-equity ratio of 1/4. The debt, which is virtually riskless, pays an interest rate of 7.6%. The expected rate of return on the equity is 15%. What would happen to the expected rate of return on equity if the firm reduced its debt-equity ratio to 1/5? Assume the firm pays no taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

   Expected rate of return equity         %

 

27. Hubbard’s Pet Foods is financed 90% by common stock and 10% by bonds. The expected return on the common stock is 12.7%, and the rate of interest on the bonds is 6.9%. Assume that the bonds are default-free and that there are no taxes. Now assume that Hubbard’s issues more debt and uses the proceeds to retire equity. The new financing mix is 72% equity and 28% debt.

 

   a. If the debt is still default-free, calculate the expected rate of return on        equity? (Do not round intermediate calculations. Round your answer to    2 decimal places.)

      Expected rate of return          %

 

   b. Calculate the expected return on the package of common stock and bonds?          (Do not round intermediate calculations. Round your answer to 2   decimal places.)

      Expected rate of return          %