I need help with this problem - I'll be honest, it's for one of my college classes, but I am not looking for just the answer; I need to know how to solve it. Thanks, and I appreciate any help!
The risk free rate is 5%. Aquarius Corporation, Arizona-based manufac-
turer of healing power crystals, has existing assets generating certain cash ?flows
of $231 million next year. A new exciting investment opportunity has surfaced,
the rights to the book ?Find Your Seventh Chakra.? The project would cost
Aquarius $100 million and generates a single certain cash ?ow of $136:5 million
next year. Aquarius has no cash on hand, and is considering ?finnancing the in-
vestment by issuing new shares. Aquarius CURRENTLY has 2 million shares
outstanding.
a) (6 points) How big of an equity stake must be given to the NEW share-
holders in order to raise the required $100 million? (Note: Find a MINIMUM
percentage required so that new shareholders just get fair return on capital).
b) (3 points) What is the value of the equity stake held by CURRENT
shareholders after the deal? How much do current shareholders benefi?t from
the deal?
c) (3 points) How many new shares must be issued, and at what price will
they be sold?
The risk free rate is 5%. Aquarius Corporation, Arizona-based manufac-
turer of healing power crystals, has existing assets generating certain cash ?flows
of $231 million next year. A new exciting investment opportunity has surfaced,
the rights to the book ?Find Your Seventh Chakra.? The project would cost
Aquarius $100 million and generates a single certain cash ?ow of $136:5 million
next year. Aquarius has no cash on hand, and is considering ?finnancing the in-
vestment by issuing new shares. Aquarius CURRENTLY has 2 million shares
outstanding.
a) (6 points) How big of an equity stake must be given to the NEW share-
holders in order to raise the required $100 million? (Note: Find a MINIMUM
percentage required so that new shareholders just get fair return on capital).
b) (3 points) What is the value of the equity stake held by CURRENT
shareholders after the deal? How much do current shareholders benefi?t from
the deal?
c) (3 points) How many new shares must be issued, and at what price will
they be sold?