Assignment 1
Corporate Finance (FIN201)
Assignment Questions: (Marks: 15)
Q1. Common Products has just made its first issue of stock. It raised $1.4 million by selling 50,000 shares of stock to the public. These are the only shares outstanding. The par value of each share was $3. Complete the following table with explanation: (Enter your answers in dollars, not in millions.). (3 Marks) (Ch 14)
Common stock (par value)
Additional paid-in capital
Retained earnings
Net common equity $2,000,000
Q2. The authorized share capital of the Alfred Cake Company is 140,000 shares. The equity is currently shown in the company’s books as follows: (Ch 14)
Common stock ($1 par value) $ 76,000
Additional paid-in capital 26,000
Retained earnings 46,000
Common equity $ 148,000
Treasury stock (1,000 shares) 20,000
Net common equity $ 128,000
a. How many shares are issued? (0.5 Mark)
b. How many shares are outstanding? (0.5 mark)
c. How many more shares can be issued without the approval of shareholders? (1 mark)
Q3. Assume that you work for a venture capital firm and have been approached by a couple of recent college graduates with a request to fund their new business. If you are interested in the idea, what process will you follow? (2.5 Marks) (Ch 15)
Q4. Fishwick Enterprises has 206,000 shares outstanding, half of which are owned by Jennifer Fishwick and half by her cousin. The two cousins have decided to sell 104,000 shares in an IPO. Half of these shares would be issued by the company to raise new cash, and half would be shares that are currently held by Jennifer Fishwick. Suppose that the shares are sold at an issue price of $50 but rise to $80 by the end of the first day’s trading. Suppose also that investors would have been prepared to buy the issue at $80. (Ch 15)
a. What percentage of the company will Jennifer own after the issue? (0.5 Mark)
b. What will her holding be worth at the end of the first day’s trading? (0.5 Mark)
c. Suppose the issue had been priced at $80. How many shares would the company have needed to sell to raise the same gross proceeds from the IPO? (0.5 Mark)
d. What in this case would be Jennifer’s wealth (cash plus the value of her remaining holding)? (0.5 Mark)
e. What is the cost of under-pricing to Jennifer in dollars? (0.5 Mark)
Q5. The common stock and debt of Northern Sludge are valued at $60 million and $40 million, respectively. Investors currently require a 16.7% return on the common stock and a/an 7.0% return on the debt. If Northern Sludge issues an additional $18 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 interest rate on Northern’s debt and that there are no taxes.
(Ch 16)
a. After the debt issue, what percent of the firm is financed with debt? (1 Mark)
b. After the debt issue, what percent of the firm is financed with equity (1 Mark)
c. What is the overall cost of capital? (1 Mark)
Q6. Dusit is financed 32% by debt yielding 8.2%. Investors require a return of 15.2% on Dusit’s equity. (Ch 16)
a. What is the company’s weighted-average cost of capital if the corporate tax rate is 21%? (1 Mark)
b. What would be the company’s cost of capital if it were exempted from corporate tax?
(1 Mark)
