1. Nano Manufacturing wants to issue 1 million new shares.

It has 4 million shares outstanding, which its

investment banking firm estimates $65 million. If the investment banking firm charges a 5%
spread, calculate the offer price and total amount ($) the firm will raise net of the spread.

2. In its negotiations with its investment bankers, Karl Cleaning Equipment has reached an agreement whereby
the investment bankers receive a smaller fee now (5% of gross proceeds versus their normal 10%) but also
receive a 1-year option to purchase an additional 200,000 shares at $6.00 per share. Karl will go public by
selling $5,000,000 of new common stock. The investment bankers expect to exercise the option and purchase
the 200,000 shares in exactly one year, when the stock price is forecasted to be $7.50 per share. However, there
is a chance that the stock price will actually be $12.00 per share one year from now. If the $12 price occurs,
what would the present value of the entire underwriting compensation be? Assume that the investment banker's
required return on such arrangements is 12%, and ignore taxes.

3. Suppose Oregon State issued $10,000,000 of 7% coupon, 20-year semiannual payment, tax-exempt bonds in
July, 2010. The bonds had 5 years of call protection, but now the state can call the bonds if it chooses to do so.
The call premium would be 6% of the face amount. Today 15-year, 6%, semiannual payment bonds can be sold
at par, but flotation costs on this issue would be 3%. What is the net present value of the refunding? Because
these are tax-exempt bonds, taxes are not relevant.

4. Lavern Tech Company must purchase $6,000,000 worth of service equipment and is weighing the merits of
leasing the equipment or purchasing. The company has a zero tax rate due to tax loss carry-forwards, and is
considering a 5-year, bank loan to finance the equipment. The loan has an interest rate of 10% and would be
amortized over 5 years, with 5 end-of-year payments. Lavern Tech can also lease the equipment for 5 end-ofyear payments of $1,790,000 each. How much larger or smaller is the bank loan payment than the lease
payment?
5. Danny Auto Glass is offering 50,000 shares of stock to the public. The offer price is $25 a share and
the underwriters spread is 7 percent. The administrative costs are $300,000. How much will Danny
Auto receive from this offering?

6. From the above question (#5), if the administrative costs are fixed, how much the firm should
offer to have $1 million net proceeds?

7. 3D Remodeling firm is considering the purchase of a new machine for $40,000. The machine is
expected to save the firm $12,500 per year in operating costs over a 5 year period, and can be
depreciated on a straight-line basis to a zero salvage value over its life. Alternatively, the firm can
lease the machine for $7,500 per year for 5 years, with the first payment due in 1 year. The firm's

tax rate is 34%, and its cost of debt is 10%. Calculate the NPV of the lease versus the purchase
decision.

(Use the information for #8-10) Cali Construction Inc. needs to add new equipment. The equipment costs
$1.5 million and the firm has to decide either purchasing the equipment using a bank loan for 100% of
the purchase price, or leasing it. The equipment falls into the MACRS 3-year class. Under either
decision, the firm must pay for insurance property taxes, and maintenance. The firms tax rate is 40%.
The loan would have an interest rate of 15%. It would be non-amortizing, with only interest paid at the
end of each year for four years and the principal repaid at year 4. The leasing terms call for $400,000
payments at the end of each of the next 4 years. The firm has no use for the machine beyond the
expiration of the lease, and the machine has an estimated value of $250,000 at the end of the 4 th year.
MACRS 3-year class

Year
1
2
3
4

Allowance Factor
0.3333
0.4445
0.1481
0.0741

8. Find yearly depreciation tax savings.

9. Find the cost of owning
10. Calculate the cost of leasing and net advantage to leasing (NAL)
Answers for 8,9 and 10: