Ryans Electronics is doing well recently. Ryans annual earnings (expected to continue indefinitely) average $5 million. The company has a market beta of 1.5. The market risk premium is 6%, and the rate for government T-bills is 5%. The combined federal-state tax rate is 40%. Ryans has $10 million of debt outstanding with a cost of 10%.

It is now the end of 2020, and Ryan would like to retrieve part of his investment from Ryans Electronics to start a new business. He decides to issue 1 million shares, 60% of which he will retain, and 40% of which he will offer for sale to the public in an IPO. He is pleased to discover that underwriting fees are waived for his firm. Ryan decides to set the issue price at $15 per share.

1. What cost of capital (cost of equity) should Ryans assign?

2. To what level does the stock price rise after the IPO?

3. How much cash is generated by the IPO for Ryan?