Full Answer Section

Calculation:

Shares to be sold = (Required net proceeds + Floatation costs) / Net proceeds per share

Required net proceeds = $120 million

Floatation costs = Underwriter’s fee + Legal, administrative, and other costs = $1.25 per share + $785,000 = $2.035 per share

Net proceeds per share = $28.00 per share – $7.5% underpricing – $2.035 flotation costs = $18.43 per share

Shares to be sold = ($120 million + $785,000) / $18.43 per share = 4,900,000 shares

FM Foods

FM Foods’ after-tax cost of equity capital is 12.2%.

Calculation:

After-tax cost of equity capital = Risk-free rate + Equity beta * (Market risk premium – Risk-free rate)

Risk-free rate = Yield to maturity on long-term government bonds = 4.4%

Equity beta = 1.20

Market risk premium = Historical excess return on common stocks = 6.5%

After-tax cost of equity capital = 4.4% + 1.20 * (6.5% – 4.4%) = 12.2%

Conclusion

The three questions you asked are all related to corporate finance. The first question asks about the interest tax shield, which is a tax deduction that a company receives for the interest it pays on its debt. The second question asks about a seasoned equity offering, which is a way for a company to raise capital by selling new shares of stock to existing investors. The third question asks about the cost of equity capital, which is the rate of return that a company expects to earn on its equity investments.