1. The Benly Company needs to raise funds for a major expansion.  The company is debating whether to issue stock or to issue bonds.  If the company issues bonds, then its debts will increase and it will be under additional stress to ensure that its revenues can cover the costs of its debt.  If it issues stock, the current owners will lose power and influence.  What should the company do?  Explain in detail your answer.

5.  The marketing director of National Midland Mortgage has been arguing with senior management about building a $50 million publishing facility.  Other managers worried about the assumptions in the analysis that support the investment - an increase in the number of mortgages processed and a reduction in processing costs.  What if the mortgage market did not grow as expected?

            a.  Should National Midland invest in the publishing facility?

           b.  What assumptions might the marketing director have made to make the investment look worthwhile?

6.         Bob Davies must decide whether to invest $100,000 in his own business or in another local business.  Both investment projects have an expected life of five years.  The cash flow of each is as follows:

            Year                            Davies                         Other

            1                                  $20,000                       $10,000

            2                                  $30,000                       $10,000

            3                                  $40,000                       $30,000

            4                                  $10,000                       $40,000

            5                                  $ 5,000                        $50,000 

Suppose the risk of the projects is the same and is accounted for by a risk premium of 6 percent per year.  Would either investment make sense?  Which would be better? 

11.       Explain what the incentives of bondholders and stockholders are. 

Are they the same? 

How do they differ? 

Will a firm with no debt act differently than a firm with a significant amount of debt? 

16.       In 2010 few firms were investing in new projects or expanding.  Yet, interest rates were extremely low.  Why, with this very low cost of capital would firms not be investing in new projects?

NOTE:

The above Exercises are from the textbook referenced below and are directly related to Chapter 17 entitled:  The Corporate Form and the Cost of Capital

References

Boyes, W. (2012). Managerial economics: Markets and the firm (2nd Ed.). Mason, Ohio: South-Western Cengage Learning.