Question
GameY Inc.has 30 million shares outstanding, with current market price at $2.50 and the company is entirely equity financed. The company plans to purchase a
GameY Inc.has 30 million shares outstanding, with current market price at $2.50 and the company is entirely equity financed. The company plans to purchase a new factory at $10 million and an additional $5 million would be needed to renovate the factory. This purchase is expected to increase the companys annual pretax earnings by $4 million in perpetuity. The companys current cost of capital is 10 percent. The company is deciding which capital structure to be used. Based on some discussions with investment banks, the company can issue bonds at par value with a coupon rate at 6 percent. The company feels that capital structure in the range of 70 percent equity/30 percent debt would be optimal. The company has a 21% corporate tax rate.
a) Suppose The GameY Inc. decides to issue equity to finance the project, what is the price per share of the firms stock?
b) Suppose The GameY Inc. decides to issue debt to finance the project, what is the price per share of the firms stock?
c) Which is better? Debt financing or equity financing?
excell plz
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started