Question 3 The green-energy company Skylift develops techniques to harness the energy in high- altitude jet-stream...

 

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Question 3 The green-energy company Skylift develops techniques to harness the energy in high- altitude jet-stream winds. Skylift has successfully developed a way to use tethered kites to capture wind energy that is currently in production. However, Skylift is now pursuing a project to use modified helicopters attached to generators on the ground to better harness this power. Skylift requires an injection of 40M of outside equity capital to invest in the project as no bank will finance such a risky project. Table 2 details the outcomes linked to the four possible states of the world relevant to Skylift's prospects. Values in millions Probabilities Skylift Kites (Assets in Place) Investment Cost NPV [Skylift Helicopter] State 1 25% 100 40 5 Table 2 State 2 25% 100 40 15 State 3 25% 580 40 10 State 4 25% 580 40 50 a) If Skylift's managers must issue equity without knowing the state of the world, what percentage of the firm must original equity holders give up in exchange for the capital? [5 marks] b) If management is maximizing the wealth of old shareholders and can sell equity at the terms described in question 3a), do they have an incentive to use their knowledge of the true state when deciding whether to issue equity and invest? Explain your answer. [4 marks] c) If management knows the true state and announces their intention to issue and invest, what percentage of the firm must original equity holders give up in order to raise the 40 million? (Assume that the market believes the managers know the true state even though the state has not been announced to the market.) [4 marks] d) Calculate the announcement return for Skylift under the assumptions in question 3c) if managers announce their intentions to issue and invest. [5 marks] e) Discuss in detail possible solutions to the problem that Skylift faces. What is the capital structure theory that best describes the issues raised in this question? [7 marks] Question 3 The green-energy company Skylift develops techniques to harness the energy in high- altitude jet-stream winds. Skylift has successfully developed a way to use tethered kites to capture wind energy that is currently in production. However, Skylift is now pursuing a project to use modified helicopters attached to generators on the ground to better harness this power. Skylift requires an injection of 40M of outside equity capital to invest in the project as no bank will finance such a risky project. Table 2 details the outcomes linked to the four possible states of the world relevant to Skylift's prospects. Values in millions Probabilities Skylift Kites (Assets in Place) Investment Cost NPV [Skylift Helicopter] State 1 25% 100 40 5 Table 2 State 2 25% 100 40 15 State 3 25% 580 40 10 State 4 25% 580 40 50 a) If Skylift's managers must issue equity without knowing the state of the world, what percentage of the firm must original equity holders give up in exchange for the capital? [5 marks] b) If management is maximizing the wealth of old shareholders and can sell equity at the terms described in question 3a), do they have an incentive to use their knowledge of the true state when deciding whether to issue equity and invest? Explain your answer. [4 marks] c) If management knows the true state and announces their intention to issue and invest, what percentage of the firm must original equity holders give up in order to raise the 40 million? (Assume that the market believes the managers know the true state even though the state has not been announced to the market.) [4 marks] d) Calculate the announcement return for Skylift under the assumptions in question 3c) if managers announce their intentions to issue and invest. [5 marks] e) Discuss in detail possible solutions to the problem that Skylift faces. What is the capital structure theory that best describes the issues raised in this question? [7 marks]

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a To calculate the percentage of the firm original equity holders must give up in exchange for the 40 million capital injection we need to determine the value of the firm in each state of the world an... View the full answer