Financial Calculations

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.

1. 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?
2. 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?
3. 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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