You decide to use a pure play/substitute approach to estimate the cost of equity and debt for the firm. This means finding a firm very similar to IMI and using its information to determine the required returns of IMI. After some research, you determine that Tesla is a close match to IMI. You gather the following information about Tesla from finance.yahoo.com and finra-markets.morningstar.com. (use the values provided below, even though they are outdated).

Market price = $250.69

Shares outstanding = 126.40 million

Most recent dividend = N/A

Beta = 1.16

3-month Treasury bill rate (assume this is an EAR) = 1.0%

Market-risk-premium = 0.08

Average yield on Tesla's debt = 5.255%

After a board meeting, you have determined that the best course of action will be to raise equity through an IPO (Initial Public Offering) and an additional 5M in debt through a bond issue. The firm's tax rate is expected to stay the same at 35%. As well, last year's EBIT was $15M, and you expect it to grow at 3% per year indefinitely. The equity value of the firm will be split 51% to a Boycott family trust, 10% to Geoff to cash out when he wants to retire, and 39% available to the public. Assume the bond issue will be used to repay the bank loan in full leaving the firm exactly $5M remaining in bond debt.

• a. Calculate the cost of equity for Tesla and use it as the cost of equity for IMI.
• b. Based on a $5M value of debt, recalculate the unlevered and levered value of IMI.
• c. Based on the value of the firm calculated in b, how much of the firm is equity?
• d. If shares of the firm are sold for $25/share, how many shares must be issued? How many shares will be in the Boycott family trust? How many will Geoff have? How many will be available in the general market?