Nuran Security Systems, Inc. needs to raise $150 million for asset expansion. As

Question

Nuran Security Systems, Inc. needs to raise $150 million for asset expansion. As it raises the capital funding, Nuran wants to maintain its current debt ratio of 60 percent. Nuran has been approved for a loan commitment from its local bank. The bank has offered the following terms: term = one year, up-front fee = 60 basis points, back-end fee = 90 basis points. Nuran expects it will take down 90 percent of the loan commitment. Nuran’s will also issue new shares of stock to support this asset growth. Nuran’s investment bank will use a firm commitment offering in which the net proceeds are $23.875 per share and the underwriter’s spread is 7 percent of the gross proceeds. Nuran Security Systems will also pay legal and other administrative costs of $750,000 for the stock issue. Calculate the amount of debt and equity funding Nuran Security Systems will need to keep its current debt ratio constant and the number of shares of stock the firm must issue to raise the needed funds. What can Nuran Security Systems, Inc. expect to pay for fees on this loan commitment and stock issue?

Explanation / Answer

Amt $ Required fund for expansion                      150 million Current debt ratio 60% Required debt to be raised=                        90 million Required Equity                          60 million Cost of front end and back end fee= 1.50% Net Debt to be raised =90/98.5%                  91.37 million Total fees to be paid for Debt =                    1.37 million Equity net proceeds per share=             23.8750 Additional legal & admion cost             750,000 Assume no of shares to be issued=k so 23.875*k-750000=60000000 k=          2,544,503 So no of shares to be issued =          2,544,503 nos Underwriter fees =7% of gross issue price Gross issue price=23.875/0.93                  25.67 So underwriter cost per share @7%= $           1.7970 Total underwrtier cost for 2544503 shares= $ 4,572,580.6 Total Admin & legal cost $   750,000.00 Total cost of equity issue= $ 5,322,580.6

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