Financial Management II Essay

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FINANCIAL MANAGEMENT II
COMM - 320
MAY/JUNE 2014 (SPRING)

Assignment 2 (10%)
1. If OSPIKA wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.
I would recommend use debt to financing. Because the capital structure with a larger debt can decrease the firm’s tax payments of income, so that the total value of the firm will increase; moreover, make paying interests tax deductible.
2. Construct OSPIKA market value statement of financial position before it announces the purchase. The market value of equity: 12 million shares of common stock outstanding * $31.40 per share 12,000,000 *$31.40 = $376,800,000
3. Suppose OSPIKA decides to issue equity to finance the purchase.
1. What is the net present value of the project? Earning after tax: 16,000,000 * (1-40%) = 9,600,000 NPV= -80,000,000 + (9,600,000/0.102) = 14,117,647.06
2. Construct OSPIKA market value statement of financial position after it announces that the firm will finance the purchase using equity. What would be the new price per share of the firm's stock? How many shares will OSPIKA need to issue to finance the purchase?
376,800,000+14,117,647.06= $390,917,647.1
The new price per share: 390,917,647.1/12,000,000 = $32.58/share
80,000,000/ 32.58 = 2,455,495 shares
2690227 shares OSPIKA need to issue to finance the purchase.
3. Construct OSPIKA market value statement of financial position after the equity issue but before the purchase has been made. How many shares of common stock does OSPIKA have outstanding? What is the price per share of the firm's stock?
The market value after the equity issue but before the purchase:
$80,000,000 + $376,800,000 + $14,117,647.06= $470,917,647.06
OSPIKA have outstanding 2,455,495 shares, and $32.58 per share of the firm’s stock.

4. Construct OSPIKA market value statement of financial position after the purchase has been made. The market value after the purchase has been made: PV= (16,000,000 * (1-40%))/0.102 = $94,117,647.06

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