QUESTION 3 A. Sims Industries, Inc. is considering two machines to replace an old machine. Machine...

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QUESTION 3 A. Sims Industries, Inc. is considering two machines to replace an old machine. Machine A has a life of 10 years, will cost $24,500, and will produce net cash savings of $4,800 per year. Machine B has an expected life of 5 years, will cost $20,000, and will produce net cash savings in operating costs of $6,000 per year. The company's cost of capital is 14 percent (6 marks) B. Fleming Educational Software, Inc., is selling 500,000 shares of stock in an auction IPO. At the end of the bidding period, Fleming's investment bank has received the following bids: Price($) Number of Shares Bid 8.00 25,000 7.75 100,000 7.50 75,000 7.25 150,000 7.00 150,000 6.75 275,000 6.50 125,000 What will the offer price of the shares be? (3 marks) c. NRG Energy, Inc. (NRG) is an energy company with a market debt-equity ratio of 3. Suppose its current debt cost of capital is 6%, and its equity cost of capital is 14%. Suppose also that if NRG issues equity and uses the proceeds to repay its debt and reduce its debt-equity ratio to 2, it will lower its debt cost of capital to 5.5%. With perfect capital markets, what effect will this transaction have on NRG's equity cost of capital and WACC? What would happen if NRG issues even more equity and pays off its debt completely? How would these alternative capital structures affect NRG's enterprise value? (7 marks) D. List 3 advantages and disadvantages of taking a company public (4 marks) QUESTION 3 A. Sims Industries, Inc. is considering two machines to replace an old machine. Machine A has a life of 10 years, will cost $24,500, and will produce net cash savings of $4,800 per year. Machine B has an expected life of 5 years, will cost $20,000, and will produce net cash savings in operating costs of $6,000 per year. The company's cost of capital is 14 percent (6 marks) B. Fleming Educational Software, Inc., is selling 500,000 shares of stock in an auction IPO. At the end of the bidding period, Fleming's investment bank has received the following bids: Price($) Number of Shares Bid 8.00 25,000 7.75 100,000 7.50 75,000 7.25 150,000 7.00 150,000 6.75 275,000 6.50 125,000 What will the offer price of the shares be? (3 marks) c. NRG Energy, Inc. (NRG) is an energy company with a market debt-equity ratio of 3. Suppose its current debt cost of capital is 6%, and its equity cost of capital is 14%. Suppose also that if NRG issues equity and uses the proceeds to repay its debt and reduce its debt-equity ratio to 2, it will lower its debt cost of capital to 5.5%. With perfect capital markets, what effect will this transaction have on NRG's equity cost of capital and WACC? What would happen if NRG issues even more equity and pays off its debt completely? How would these alternative capital structures affect NRG's enterprise value? (7 marks) D. List 3 advantages and disadvantages of taking a company public (4 marks)