Question
1. Babyes. is expanding and needs $12.6 million to help fund this growth. The firm estimates it can sell new shares of stock for $32.50
1. Babyes. is expanding and needs $12.6 million to help fund this growth. The firm estimates it can sell new shares of stock for $32.50 a share. It also estimates it will cost $340,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a 7.5% spread. How many shares of stock must Babys sell if it is going to have $12.6 million available for its expansion needs?
2. Babys is analyzing a project that is an extension of the firm's current operations and thus is equally as risky as the current firm. The firm uses debt and common stock to finance its operations and maintains a debt/equity ratio of 0.60. The after-tax cost of debt is 4.8%, the cost of equity is 11.7%, and the tax rate is 35%. What is the appropriate discount rate for this project?
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