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Seasoned equity offering

Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas if it goes through with the debt issuance?
Carbon8 Corporation wants to raise $120 million in a seasoned equity offering, net of all fees. Carbon8 stock currently sells for $28.00 per share. The underwriters will require a fee of $1.25 per share, and indicate that the issue must be underpriced by 7.5%. In addition to the underwriter’s fee, the firm will incur $785,000 in legal, administrative, and other costs. How many shares must Carbon8 sell in order to raise the desired amount of capital?
FM Foods is evaluating its cost of capital. Use the following information provided on December 31, 2017, to estimate FM’s after-tax cost of equity capital.
Yield to maturity on long-term government bonds: 4.4%
Yield to maturity on company long-term bonds: 6.3%
Coupon rate on company long-term bonds: 7%
Historical excess return on common stocks: 6.5%
Company equity beta: 1.20
Stock price: $40.00
Number of shares outstanding (millions): 240
Book value of equity (millions): $5,240
Book value of interest-bearing debt (millions): $1,250
Tax rate: 35.0%

Sample Solution

ality of descriptions, seen in Chapter 1, showing that self-defence cannot always justify one’s actions. Even more problematic, is the case of self-defence in war, where two conflicting views are established: The Collectivists, a whole new theory and the Individualists, the continuation of the domestic theory of self-defence (Frowe (2011), Page 9& 29-34). More importantly, Frowe refutes Vittola’s view on vengeance because firstly it empowers the punisher’s authority, but also today’s world prevents this action between countries through legal bodies like the UN, since we have modernised into a relatively peaceful society (Frowe (2011), Page 80-1). Most importantly, Frowe further refutes Vittola through his claim that ‘right intention cannot be used as an excuse to wage war in response to anticipated wrong,’ suggesting we cannot just harm another just because they have done something unjust. Other factors need to be considered, for example, Proportionality. Thirdly, Vittola argues that war should be avoided (Begby et al (2006b), Page 332) and that we should proceed circumstances diplomatically. This is supported by the “last resort” stance in Frowe, where war should not be permitted unless all measures to seek diplomacy fails (Frowe (2011), Page 62). This means war shouldn’t be declared until one party has no choice but to declare war, in order to protect its territory and rights, the aim of war. However, we can also argue that the war can never be the last resort, given there is always a way to try to avoid it, like sanctions or appeasement, showing Vittola’s theory is flawed. Fourthly, Vittola questions upon whose authority can demand a declaration of war, where he implies any commonwealth can go to war, but more importantly, “the prince” where he has “the natural order” according to Augustine, and all authority is given to him. This is further supported by Aristotle’s Politics ((1996), Page 28): ‘a king is the natural superior of his subjects.’ However, he does later emphasise to put all faith in the prince is wrong and has consequences; a thorough examination of the cause of war is required along with the willingness to negotiate rival party (Begby et al (2006b), Page 312& 318). This is supported by the actions of Hitler are deemed unjustly. Also, in today’s world, wars are no longer fought only by states but also non-state actors like Al-Queda and ISIS, showing Vittola’s normative claim on authority is outdated. This is further supported by Frowe’s claim that the leader needs to represent the people’s interests, under legitimate authority, which links on to the fourth condition: Public declaration of war. Agreed with many, there must be an official announcement on a declaration of war (Frowe (2011), Page 59-60&63).
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