Question 1. Kern Corporation entered into an agreement with its investment banker to sell 10 million shares of the company's stock with Kern netting $225 million from the offering. The expected price to the public was $25 per share.
The out-of-pocket expenses incurred by the investment banker were $5 million.
a. What profit or loss would the investment banker incur if the issue were sold to the public at an average price of $25 per share?
b. What profit or loss would the investment banker realize if the issue were sold to the public at an average price of $20 per share?
c. Is the agreement between the company and its investment banker an example of a negotiated or a best-efforts deal? Why? Which is riskier to the company? Why?
Question 2. Reynolds Corporation plans to purchase equipment at a cost of $3 million. The company's tax-rate is 30 percent and the equipment's depreciation would be $600,000 per year for 5 years. If the company leased the asset on a 5-year lease, the payment would be $700,000 at the beginning of each year. If Reynolds borrowed and bought, the bank would charge 11 percent interest on the loan.
a. Calculate the cost of purchasing the equipment with debt.
b. Calculate the cost of leasing the equipment.
c. Calculate NAL? Should the company buy or lease the equipment? Why?