1. The Beranek Company, whose stock price is now $25, needs to raise $20 million in common stock.  Underwriters have informed the firm's management that they must price the new issue to the public at $22 per share because of signaling effects.  The underwriters' compensation will be 5% of the issue price, so Beranek will net $20.90 per share.  The firm will also incur expenses in the amount of $150,000.

How many shares must the firm sell to net $20 million after underwriting and flotation expenses?

2. Zang Industries has hired the investment banking firm of Eric, Schwartz, & Mann (ESM) to help it go public.  Zang and ESM agree that Zang's current value of equity is $60 million.  Zang currently has 4 million shares outstanding and will issue 1 million new shares.  ESM charges a 7% spread.  What is the correctly valued offer price?  How much cash will Zang raise net of the spread?

3. Reynolds Construction needs a piece of equipment that costs $200.  Reynolds can either lease the equipment or borrow $200 from a local bank and buy the equipment.  If the equipment is leased, the lease would not have to be capitalized.  Reynold's balance sheet prior to the acquisition of the equipment is as follows:

Current assets                   $300                         Debt                $400

Net Fixed Assets                500                          Equity             $400

Total assets                      $800                         Total clams      $800

a. What is Reynold's current debt ratio

b. What would be the company's debt ratio if it purchased the equipment?

c. What would be the debt ratio if the equipment were leased?

4. Consider the data in Problem 3.  Assume that Reynolds's tax rate is 40% and that the equipment's depreciation would be $100 per year.  If the company leased the asset on a 2 year lease, the payment would be $110 at the beginning of each year.  If Reynolds borrowed and bought, the bank would charge 10% interest on the loan.  In either case, the equipment is worth nothing after 2 years and will be discarded.  Should Reynolds lease on buy the equipment?

5. Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine.  It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery.  Assume that the following facts apply.

a. The machinery falls into the MACRS 3-year class.

b. Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance.

c. The firm's tax rate is 40%.

d. The loan would have an interest rate of 15%.  It would be nonamortizing with only interest paid at the end of each year for four years and the principal repaid at Year 4.