Scribd
Upload
23 views3 pages

Week 10 Activity

The document outlines financial calculations for Salinas Corp, including the annual interest tax shield, which amounts to $560,000 based on a debt issuance. It also details the required number of shares Carbon8 must sell to raise $120 million, which is approximately 4.9 million shares after accounting for fees. Lastly, it calculates the cost of capital for the company as 11.27% based on the weighted average of equity and debt costs.

Uploaded by

kevin wabwile
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
23 views3 pages

Week 10 Activity

The document outlines financial calculations for Salinas Corp, including the annual interest tax shield, which amounts to $560,000 based on a debt issuance. It also details the required number of shares Carbon8 must sell to raise $120 million, which is approximately 4.9 million shares after accounting for fees. Lastly, it calculates the cost of capital for the company as 11.27% based on the weighted average of equity and debt costs.

Uploaded by

kevin wabwile
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

1

WEEK 10 ACTIVITY - FINANCIAL CALCULATIONS

Your name
Institution
Course
Instructor’s name
Date
2

Question 1
In order to calculate the annual interest tax shield to Salinas Corp if it goes through with the debt
issuance we would have to calculate the following formula:
Annual Interest tax shield = Interest * tax
Interest = debt *rate of interest =$20 million * 0.07 = $ 1.40 million
Now, Annual Interest tax shield =$1.40 million * 0.40 = $560,000
Therefore, the annual interest tax shield to Salinas Corp becomes $560,000.
Question 2
Required Net of all fees = $ 120 Million
legal, administrative, and other costs = $ 785,000
Issue Price = $28 - 7.5%*28
= $25.90
Underwriter Fee per share = $1.25
Net issue price after Underwriter Fee = $(25.90 - 1.25)
= $24.65
Number of shares Carbon8 must sell in order to raise the desired amount of capital
= (Required Net of all fees + legal, administrative, and other costs)/Net issue price after
Underwriter Fee
= (120000000+785000)/24.65
= $4,900,000
Question 3
Cost of capital=(weight of equity*cost of equity)+(weight of debt*after tax cost of debt)
Market value of equity = number of shares*price of each share
= 240*40
= 9600 million
Market value of debt = Book value of debt, trading at par
= 1250 million
Total capital = Market value of equity + Market value of debt
= 9600+1250
3

=10850 million
Weight of equity = Market value of equity/Total capital
= 9600/10850
= 88.48%
Weight of debt = Market value of debt/Total capital
= 1250/10850
= 11.52%
Cost of equity = risk free rate+(beta*market risk premium)
risk free rate = yield on government bonds are safest, hence risk free=4.4%
market risk premium=excess returns on stocks = 6.5%
Cost of equity = 4.4%+(1.2*6.5%)
=12.20%
After tax cost of debt = Yield to maturity on bonds*(1-tax rate)
= 6.3%*(1-35%)
= 4.095%
Cost of capital = (88.48%*12.20%)+(11.52%*4.095%)
=11.27%
Hence, the cost of capital is 11.27%.

You might also like