How big of an equity stake must be

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Qusetion: 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 flow of $136.5 million next year. Aquarius has no cash on hand, and is considering financing the in- vestment by issuing new shares. Aquarius CURRENTLY has 2 million shares outstanding.

a) 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) 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) How many new shares must be issued, and at what price will they be sold?

Reference no: EM132073648

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