1) Moonscape has just completed an initial public offering. The firm sold 5 million shares at an offer price of $8 per share. The underwriting spread was $0.30 a share. The price of the stock closed at $12.00 per share at the end of the first day of trading. The firm incurred $500,000 in legal, administrative, and other costs. What were flotation costs as a fraction of funds raised? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
2) Young Corporation stock currently sells for $40 per share. There are 1 million shares currently outstanding. The company announces plans to raise $5 million by offering shares to the public at a price of $40 per share.
a. If the underwriting spread is 6%, how many shares will the company need to issue in order to be left with net proceeds (before other administrative costs) of $5 million ? (Do not round intermediate calculations. Round your answer to the nearest whole number.)
b. If other administrative costs are $55,000, what is the dollar value of the total direct costs of the issue? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
c. If the share price falls by 5% at the announcement of the plans to proceed with a seasoned offering, what is the dollar cost of the announcement effect? (Enter your answer in dollars not in millions.)
3) River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $190,000 of debt at an interest rate of 10% and use the proceeds to repurchase 19,000 shares at $10 per share. Profits before interest are expected to be $119,000.
a. What is the ratio of price to expected earnings for River Cruises before it borrows the $190,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. What is the ratio after it borrows? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
4) The common stock and debt of Northern Sludge are valued at $80 million and $20 million, respectively. Investors currently require a return of 16.2% on the common stock and a return of 7.5% on the debt. If Northern Sludge issues an additional $11 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. (Do not round intermediate calculations. Enter your answer as a whole percent.)