Its core business is the buying and selling of LPG. The board is adamant that the debt-to-equity ratio remains at or below 70%. Given that Tonga does not have a natural dam and, the ever-increasing price of diesel fuel, the board of directors want to undertake a project that involves the use of LPG to generate electricity. Current research shows that LPG generated electricity is a much cheaper and environmentally friendly alternative to diesel generated electricity.

We know the following about Sam Ltd:

Shares outstanding	5,000,000
Current share price	$3.75

The LPG generated electricity project has the following specifics:

LPG ELECTRICITY PLAN
Plan	Details
Project cost	$15,000,000
Additional before tax earnings per year	$3,450,000
Cost of capital	15.00%
Interest on loan	12%
Tax rate	30%

Required:

1. Before the project is implemented, create the market value balance sheet. (3 marks)
2. Suppose that the board of directors directed Sam to fund the project with equity:
   1. Calculate the net present value of the project (4 marks)
   2. Create the balance sheet after Sam announces the firm will finance the project through equity (3 marks)
   3. Given your answer in 2b., what would be the new share price? (2 marks)
   4. Given your answer in 2c., how many additional shares are required to fund the project? (3 marks)
   5. Create the balance sheet after the new share issue but before the project is implemented. (3 marks)
   6. Given 2e., what is the share price after the new share issue but before the project is implemented? (3 marks)
   7. Create the balance sheet after the purchases is made. (3 marks)
3. Sam comes to you for advice on whether debt financing the project will result in increased shareholder wealth? You are to:
   1. Calculate Sam Ltd.s market value if the project is funded entirely with debt. (2 marks)
   2. Create the balance sheet after both the debt borrowing and the implementation of the project. (2 marks)
   3. Given 3b. what is the share price? (2 marks)
4. While debt financing maximises Sam Ltd wealth, the board is worried about the control of the business. You are to:
   1. Demonstrate that debt financing maximises wealth for Sam Ltd and (2 marks)

2. Comment on the delicate balance between control and wealth maximisation. Use Sam Ltd and the proposed LPG electricity project as demonstration. (3 marks)