Financing the Expansion Plan

Financing the Expansion Plan

Question no # 1

After tax cost of debt

Cost of debt

8%

Tax rate

50%

Formula for finding after tax cost of debt

kd(1-t)

After tax cost of debt

4%

Kd represents cost of debt

Question no # 2

Yes, annual $500,000 sinking fund requirement should be considered when weighing the debt alternative.

Question no # 3

Percentage of company that pre-acquisition shareholders own

Existing number of shares

900,000

New number of shares to be issued

400,000

New share price

$ 25

Total amount that new issue offers

10,000,000

Total number of shares after new issue

1,300,000

Percentage of company that pre-acquisition shareholders own

69.23%

The total number of existing share holders are not given so it is assumed that ...