Practice Question $3$

a$.$ Ben Kim Investors $($BKI$)$ has a success ratio of $18\%$ with its venture funding. Their owners

require a rate of return of $30\%$ for their portfolio of lending, and the average length on

each loan is $6$ years. If you were to apply to BKI for a $$350,000$ loan, what is the annual

percentage rate you would be required to pay for this loan?

b$.$ Ewing Energy is in the process of issuing a $20-$year, $8\mathrm{.}75\%$ coupon $($paid semi$-$annually$)$

AA$2-$rated corporate bond with $$1000$ par value. If by the time the bonds receive SEC

clearance, the market yield on this bond goes to $9\mathrm{.}05\%,$ and the company sells $35,000$ of

these bonds with the help of an investment banker who charges them a commission rate

of $2\mathrm{.}75\%$ on the proceeds, what will the total proceeds be for the issuing company, and

what is the cost of these bonds to the firm in terms of the cost of capital? What are the

firm's future cash obligations?

c$.$ Mason Merchant Banking offers Phoenix Pharmaceuticals the following options on its

initial public sale of equity: $(1)$ a best$-$efforts arrangement whereby Mason will keep $3\%$

of the retail sales or $(2)$ a firm$-$commitment arrangement of $$9,000,000.$ Phoenix plans

on offering $1,500,000$ shares at $$11\mathrm{.}25$ per share to the public. If $100\%$ of the shares are

sold, which is the better choice for Phoenix Pharmaceuticals? Which is the better choice

for mason Merchant Banking? What is the break$-$even sales percentage for Phoenix

$($point of indifference$)$ and what will each party receive at the break$-$even sales

percentage?