assignment 4 capital structure anaylsis A Bedford

assignment 4 capital structure anaylsis A Bedford - Strayer...

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Strayer University/ School of Business Ft Lauderdale Assignment for Course: fin 534 Submitted to: Dr Williams Submitted By: Alexis Bedford Date of Submission: September 10, 2011 Title of Assignment: FIN 534 Assignment # 4: Capital Structure Analysis CERTIFICATION OF AUTHORSHIP: I certify that I am the author of this paper and that any assistance I received in its preparation is fully acknowledged and disclosed in the paper. I have also cited any sources from which I used data, Ideas or words, either quoted directly or paraphrases. I also certify that this was prepared by me specifically for this course. Student’s Signature: Alexis Bedford ************************************************************************ Instructors Grade on Assignment: Instructors Comments:
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Problem: Info Systems Technology manufactures microprocessor chips for use in appliances and other applications. ITS has no debt and $100 Million shares outstanding. The correct price for these shares is either $14.50 or $12.50 per share. Investors view both possibilities as equally likely, so the shares currently trade for $13.50. ITS must raise $500 million to build a new production facility. Because the firm would suffer a large loss of both customers and engineering talent in the event of financial distress managers believe that if IST borrows the $500 million, the present value of financial distress cost will exceed any tax benefits by $20 million. At the same time, because investors believe that managers will know the correct share price, ITS faces a lemon problem if it attempts to raise the $500 million by issuing equity. Introduction: The problem at hand is that ITS must raise $500 Million to Build a new facility. One of the options to raise the money is to borrow the money and incure a debt, or to sell equity through the sale of stock. The issue the management is dealing with is wheter or not selling equity will
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assignment 4 capital structure anaylsis A Bedford - Strayer...

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