Reference no: EM133070376

Question 1: An investment bank is conducting an equity issuance to raise equity capital for a manufacturing firm to finance its $126 million new project that has a present value of $188 million. The firm has a debt of $52.3 million in place. The average annual earnings of the firm has been $12.8 million, and EBITDA $21 million. P/E and V/EBITDA ratios of comparable firms without debt are 14 and 12.3, respectively.

a) If the issuing firm requires increasing its existing shareholders' wealth by a minimum of 25% with the issuance and investment, what maximum issuance costs (IC max) can the investment bank charge?

b) If the investment bank charges the IC max calculated above, what is the fraction of ownership does the firm need to sell to new investors?

c) If the target share price after the issuance is $21, how many shares need to be sold to new investors?

Question 2: The uncertainty of liquidity needs faced by a bank is represented by random deposit withdrawals that follow a normal distribution with mean of $ 0.4 million and standard deviation of $13 million. If spread (rL-r) = 3.92%, and penalty rate of liquidity shortage rp= 14%. How much should the bank save as its cash reserve to cope with its liquidity risk? (Use EXCEL)