1- The Benly Company needs to raise funds for a major expansion. The company is
ID: 1211618 • Letter: 1
Question
1- The Benly Company needs to raise funds for a major expansion. The company is debating whether to issue stock or issue bonds. If the compoany issues bonds, then its debts will increase and it will be under additional stress to ensure that its revenues can cover the costs of its debt. If it issues stock, the current owners will lose power and influence. What should the company do? Explain your answer.
5- The marketing director of National Midland Mortgage has been arguing with senior management about building a $50 million publishing facility. Other manangers worried about the assumptions in the analysis that support the investment- an increase in the number of mortgages processed and a reduction in processing costs. What if teh mortgage market did not grow as expected?
A- Should National Midand invest in the publishing facility?
B- What assumptions might the marketing director have made to amke the investment look worthwhile?
6- Bob Davies must decide whether to invest $100,000 inhis own business or in another local business. Both investment projects have an expexted life of 5 years. Tha cash flow of each is as follows:
Year 1- Davies $20,000 Other $10,000
Year 2 Davies $30,000 Other $10,000
Year 3 Davies $40,000 Other $30,000
Year 4 Davies $10,000 Other $40,000
Year 5 Davies $5,000 Other $50,000
Suppose the risk of the projects is the same ans is accounted for by a risk premium of 6% per year. Would either investment make sense? Which would be better?
11- Explain what the incentives of bondholders and stockholders are. Are they the same? How do they differ? Will a firm with no debt act differently than a firm with a significant amount of debt?
16- In 2010 few firms were investing in new projects or expanding. Yet, interest rates were extremely low. Why, with this very low cost of capital would frims not be investing in new projects?
Explanation / Answer
1.
Yes there are costs and benfits related to both sources of funding, but in this case i will suggest the company might go for mix of both sources of finance so that it didnt need to compormise on one front. But the weight of debt or equity in the total funding should be determined by the cost of funding in terms of interest cost on debt, availability of loans at reasonable terms and for equity the capital market enviornment and also the terms offered by the equity investors.
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