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Question 3 An investment bank is conducting an equity issuance to raise equity capital for a manufacturing firm to finance its $126 million new project
Question 3
An investment bank is conducting an equity issuance to raise equity capital for a manufacturing firm to finance its $126 million new project that has a present value of $188 million. The firm has a debt of $52.3 million in place. The average annual earnings of the firm has been $12.8 million, and EBITDA $21 million. P/E and V/EBITDA ratios of comparable firms without debt are 14 and 12.3, respectively.
- a)If the issuing firm requires increasing its existingshareholders' wealth by a minimumof 25% with the issuance and investment, what maximum issuance costs (ICmax) can the investment bank charge?
- b)If the investment bank charges the ICmaxcalculated above, what is the fraction of ownership does the firm need to sell to new investors?
- c)If the target share price after the issuance is $21, how many shares need to be sold to new investors?
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