I need details, thanks you very much! Question 47 Use the following information

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I need details, thanks you very much!

Question 47
Use the following information to answer the following question(s).

Your firm is trying to determine whether it should finance a project requiring $800,000 with new common stock or with debt. The firm is faced with the following financing alternatives:
I: Issue new common stock. Sale price of the common stock is expected to be $40 per share.
II: Issue new bonds with a coupon rate of 12%.
The firm has a marginal tax rate of 34%, the company currently has 40,000 shares of common stock outstanding, and $90,000 face value of 10% debt outstanding.


Total shares outstanding will be:
Answer

A20,000 under alternative I and zero under alternative II.

B60,000 under both alternative I and alternative II.

C40,000 under alternative I and 60,000 under alternative II.

D60,000 under alternative I and 40,000 under alternative II.

Question 48
Use the following information to answer the following question(s).

Your firm is trying to determine whether it should finance a project requiring $800,000 with new common stock or with debt. The firm is faced with the following financing alternatives:
I: Issue new common stock. Sale price of the common stock is expected to be $40 per share.
II: Issue new bonds with a coupon rate of 12%.
The firm has a marginal tax rate of 34%, the company currently has 40,000 shares of common stock outstanding, and $90,000 face value of 10% debt outstanding.


The total interest obligation will be:
Answer

A $105,000 under alternative I and $9,000 under alternative II.

B $105,000 under both alternative I and alternative II.

C $9,000 under alternative I and $105,000 under alternative II.

D zero under alternative I and $96,000 under alternative II.

Explanation / Answer

The total interest obligation will be: Alternative I: No new bonds are issued so the original $9,000 ($90,000 at 10%) don´t change. Alternative II: Bonds for $800,000 at 12% coupon rate are issued, then $800,000 * 0.12 = $96,000 are added to the original $9,000 to obtain a total of $105,000 of total interest obligation. The correct answer is b) $9,000 under alternative I, and $105,000 under alternative II.

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