Write a six to eight (6-8) page paper in which you: 1. Examine t...

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Write a six to eight (6-8) page paper in which you:

1. Examine the pros and cons of an IPO for Galaxy International. Recommend whether the company should or should not proceed with an IPO.

2. Evaluate the appropriateness of the financing alternatives and strategies that are available to Jeremy, and select the one (1) you believe best suits the company.
Provide support for your rationale.

3. Determine the advantages of debt over equity, and what each would cost after taxes.
Determine Galaxy’s weighted average cost of capital (WACC) if it uses both alternatives to raise capital (i.e., debt and equity).

4. Recommend one (1) specific financial derivative contract that Jeremy could use to ensure a stable supply of oil for his operations and to protect his firm from currency translation losses.
Provide support for your suggestion.

5. Suggest one (1) specific type of financial derivative contract that Jeremy can use to hedge his currency translation and transaction exposure to the Yuan.
Provide support for your suggestion. Note: You should discuss a different approach than the one recommended for the previous rubric.

6. Determine whether Jeremy should lease or buy the plant in China.
Justify your position using information regarding the current economic state in China, foreign investment climate, and leasing versus buying restrictions. Complete a NPV analysis on both the lease and the buy options using the data provided to further support your recommendation.

7. Determine if a portfolio manager would want to participate in the IPO if Galaxy International goes public.
Provide a rationale for your decision. Determine the expected return on the stock using Capital Asset Pricing Model (CAPM) and discuss how this affects your recommendation.

8. Determine if the Galaxy International’s expected return on stock would exceed its WACC.
Discuss how this affects your analysis.

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Case of Galaxy International

Answer 1:
Initial Public Offering (IPO) is an attractive way for small companies to raise funds from markets. As Galaxy International is considering international expansion, it would serve as an easy route to raise additional capital since IPO provides liquidity to the investors and the illiquidity risk premium required by investors is eliminated. Second, it also helps in brand visibility since consumers become aware of the new company and its products. Third, it also provides founders with an exit strategy and helps the company to get a new set of owners that can steer it in the growth direction. However, there are several drawbacks also. First, the costs associated with regulatory compliance can be very high. Second, there is increased pressure on companies to report short term gains so that the stock can perform well in the stock market. Since there are agency problems associated with separation of ownership and management due to listing of companies, a small company may find it difficult to take decisions. In the case of Galaxy, the company has proven track record over the past 20 years and IPO is the suggested option as it seeks to explore international opportunities so that it can raise funds from the market as needed and optimize the leverage levels. IPO also increases transparency with respect to business performance and this boosts investor’s confidence in the company.
Answer 2:
Galaxy has three basic strategies available – use of debt, use of equity or usage of a mix of debt and equity. The interest payments made on debt are tax deductible and as such, it provides tax shield which causes the cost of debt to be lower than the cost of equity. Since equity...

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