Topic: Capital Structure

Part A:(8 Marks)

Dazin corporation is an unlevered firm. Recently, the company decided to expand its business. For this purpose, it would require a capital of $30 million. The company may raise the capital through equity financing, and for this reason, it must sell 2/3^rd of the equity stakes. However, this decision would dilute the firm's ownership control. The firm does not want to lose control and, therefore, intends to keep fifty percent ownership.

Required:

a.Assume that the firm finances $20 million through borrowing; what percentage of equity would Dazin corporation need to sell to finance $10 million? (Assume that the firm operates in a perfect capital market) (4 Marks)

b.Calculate the smallest amount Dazin corporation can borrow to finance $30 million without losing ownership control (Assume that the firm operates in a perfect capital market). (4 Marks)