Impossible Industries, Inc., has $10 billion worth of outstanding debt and 800 million shares of common stock trading at $50 per share. Impossible can invest $5 billion in a perpetual motion machine yielding future cash flows having a current market value of $6.5 billion. Impossible faces a tax rate of 35%, and pays brokerage commissions of 5% on equity and real asset transactions, financed using internal cash. Ignore brokerage costs on debt.
For each of the following financing plans, calculate the APV of the project, Impossible's market value after project adoption, the value of equity after adoption, the effect of project adoption on Impossible's share price, and the number of shares that it must sell or repurchase.
a. Impossible finances the project with 80% debt and 20% equity.
b. Impossible structures debt and equity financing to maintain its current debt ratio.
c. Impossible sells existing assets for $4 billion, and finances the remainder with internal cash. The assets have a current book value of $2.5 billion.
The answer key says the solutions are:
a. APV = 2,867.500; D_hat + E_hat = 57,900.000; E_hat = 43,900.000; P_hat - P = $3.6250; K_hat - K = 18.6480 m.
b. APV = 1,872.1774; D_hat + E_hat = 56,989.2473; E_hat = 45,591.3978; P_hat - P = $2.4866; K_hat - K = 68.6300 m.
c. APV = 845.000; D_hat +E_hat = 52,500.000; E_hat = 42,500.000; P_hat - P = $3.1250; K_hat - K = 0
How do I get these solutions?