1) Times are hard for Auger Biotech. Having raised $85 million in the initial public offering of its stock early in year, company is poised to launch its product. If Auger engages in the promotional campaign costing $60 million this year, its annual after-tax cash flow over next five years will be only $700,000. If it doesn’t undertake campaign, it is expecting its after-tax cash flow to be minus $18 million annually for same period. Supposing company has decided to stay in its selected business, is this campaign valuable when discount rate is 10%? Describe why or why not?
2) Overland's favoured stock was issued three years ago to yield= 10% of its par value of= $30. The stock is selling in market today for= $50. Supposing that Overland pays 15% in flotation costs on new security issues, compute cost of favoured stock financing.
i) 9.2%
ii) 8.5%
iii) 7.1%
iv) 6.3%