QUESTION 3 A. Sims Industries, Inc. is considering two machines to replace an old machine. Machine A has a lifeof 10 years, will cost $24.500, and will produce net cash savings of $4.800 per year. Machine B has an expected life of years, will cost $20,000, and will produce net cash savings in operating costs of $6,000 per year. The company'scost of capital is 14 percent(6 marks) B. Fleming Educational Software, Inc., is selling 500,000 shares of stock in an auction IPO At the end of the biddingperiod. Fleming's investment bank has received the following bids: Price(s) 8.00 7.75 Number of Shares Bid 25,000 100.000 75.000 150,000 150,000 7.50 7.25 7.00 6,75 275.000 125,000 6.50 What will the offer price of the shares be? (3 marks) QUESTION 3 A. Sims Industries, Inc. is considering two machines to replace an old machine. Machine has a lifeof 10 years, will cost $24.500, and will produce net cash savings of $4.800 per year. Machine B has an expected life of years, will cost $20,000, and will produce net cash savings in operating costs of $6,000 per year. The company'scost of capital is 14 percent(6 marks) B. Fleming Educational Software, Inc., is selling 500,000 shares of stock in an auction IPO At the end of the biddingperiod, Fleming's investment bank has received the following bids: Price(s) 8.00 7.75 7.50 7.25 Number of Shares Bid 25,000 100.000 75,000 150,000 150,000 275,000 125,000 7.00 6.75 6.50 What will the offer price of the shares be? (3 marks) C. NRG Energy, Inc. (NRG) is an energy company with a market debt-equity ratio of 3. Supposeits current debt cost of capital is 6%, and its equity cost of capital is 14% Suppose also that ifNRG issues equity and uses the proceeds to repay its debt and reduce its debt-equity ratio to 2, it will lower its debt cost of capital to 5.5%. With perfect capital markets, what effect will thistransaction have on NRG's equity cost of capital and WACC? What would happen if NRGissues even more equity and pays of its debt completely? How would these alternative capitalstructures affect NRG's enterprise value?7 marks) D. List 3 advantages and disadvantages of taking a company public (4 marks) QUESTION 3 A. Sims Industries, Inc. is considering two machines to replace an old machine. Machine A has a lifeof 10 years, will cost $24.500, and will produce net cash savings of $4.800 per year. Machine B has an expected life of years, will cost $20,000, and will produce net cash savings in operating costs of $6,000 per year. The company'scost of capital is 14 percent(6 marks) B. Fleming Educational Software, Inc., is selling 500,000 shares of stock in an auction IPO At the end of the biddingperiod. Fleming's investment bank has received the following bids: Price(s) 8.00 7.75 Number of Shares Bid 25,000 100.000 75.000 150,000 150,000 7.50 7.25 7.00 6,75 275.000 125,000 6.50 What will the offer price of the shares be? (3 marks) QUESTION 3 A. Sims Industries, Inc. is considering two machines to replace an old machine. Machine has a lifeof 10 years, will cost $24.500, and will produce net cash savings of $4.800 per year. Machine B has an expected life of years, will cost $20,000, and will produce net cash savings in operating costs of $6,000 per year. The company'scost of capital is 14 percent(6 marks) B. Fleming Educational Software, Inc., is selling 500,000 shares of stock in an auction IPO At the end of the biddingperiod, Fleming's investment bank has received the following bids: Price(s) 8.00 7.75 7.50 7.25 Number of Shares Bid 25,000 100.000 75,000 150,000 150,000 275,000 125,000 7.00 6.75 6.50 What will the offer price of the shares be? (3 marks) C. NRG Energy, Inc. (NRG) is an energy company with a market debt-equity ratio of 3. Supposeits current debt cost of capital is 6%, and its equity cost of capital is 14% Suppose also that ifNRG issues equity and uses the proceeds to repay its debt and reduce its debt-equity ratio to 2, it will lower its debt cost of capital to 5.5%. With perfect capital markets, what effect will thistransaction have on NRG's equity cost of capital and WACC? What would happen if NRGissues even more equity and pays of its debt completely? How would these alternative capitalstructures affect NRG's enterprise value?7 marks) D. List 3 advantages and disadvantages of taking a company public (4 marks)
