8.

value:
1.00 points

 

American Health Systems currently has 6,400,000 shares of stock outstanding and will report earnings of $13 million in the current year. The company is considering the issuance of 1,500,000 additional shares that will net $60 per share to the corporation.

 

a. What is the immediate dilution potential for this new stock issue? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Dilution $  per share

 

b-1. Assume that American Health Systems can earn 8 percent on the proceeds of the stock issue in time to include them in the current year’s results. Calculate earnings per share. (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Earnings per share $

 

b-2. Should the new issue be undertaken based on earnings per share?
   
 
Yes
No

 

9.

value:
1.00 points

 

Assume Sybase Software is thinking about three different size offerings for issuance of additional shares.

 

         Size of Offer Public Price Net to Corporation
   a. $ 2.4   million   $ 46     $ 42.60  
   b.   7.0   million     46       43.20  
   c.   28.0   million     46       43.50  

 

What is the percentage underwriting spread for each size offer? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

 

  Size of Offer     Underwriting Spread
  a. $2.4 million  %
  b. $7.0 million  %
  c. $28.0 million  %

 

0.

value:
2.00 points

 

The Wrigley Corporation needs to raise $35 million. The investment banking firm of Tinkers, Evers, & Chance will handle the transaction.

 

a. If stock is utilized, 2,200,000 shares will be sold to the public at $17.20 per share. The corporation will receive a net price of $16.00 per share. What is the percentage underwriting spread per share?(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

  Underwriting spread per share  %

 

b. If bonds are utilized, slightly over 35,200 bonds will be sold to the public at $1,006 per bond. The corporation will receive a net price of $993 per bond. What is the percentage of underwriting spread per bond? (Relate the dollar spread to the public price.) (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

  Underwriting spread per bond  %

 

c-1. Which alternative has the larger percentage of spread?
   
 
Stock
Bond

 

c-2. Is this the normal relationship between the two types of issues?
   
 
Yes
No

 

11.

value:
2.00 points

 

Kevin’s Bacon Company Inc. has earnings of $5 million with 2,400,000 shares outstanding before a public distribution. Five hundred thousand shares will be included in the sale, of which 300,000 are new corporate shares, and 200,000 are shares currently owned by Ann Fry, the founder and CEO. The 200,000 shares that Ann is selling are referred to as a secondary offering and all proceeds will go to her.
     The net price from the offering will be $18.50 and the corporate proceeds are expected to produce $1.7 million in corporate earnings.

 

a. What were the corporation’s earnings per share before the offering? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Earnings per share $

 

b. What are the corporation’s earnings per share expected to be after the offering? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Earnings per share $

 

 

 

13.

value:
2.00 points

 

The investment banking firm of Einstein & Co. will use a dividend valuation model to appraise the shares of the Modern Physics Corporation. Dividends (D1) at the end of the current year will be $1.50. The growth rate (g) is 7 percent and the discount rate (Ke) is 10 percent.

 

a. What should be the price of the stock to the public? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Price of the stock $

 

b. If there is a 6 percent total underwriting spread on the stock, how much will the issuing corporation receive? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Net price to the corporation $

 

c. If the issuing corporation requires a net price of $48.50 (proceeds to the corporation) and there is a 6 percent underwriting spread, what should be the price of the stock to the public? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Necessary public price $

 

 

14.

value:
3.00 points

 

The Landers Corporation needs to raise $1.20 million of debt on a 5-year issue. If it places the bonds privately, the interest rate will be 8 percent. Twenty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 8 percent, and the underwriting spread will be 5 percent. There will be $100,000 in out-of-pocket costs. Assume interest on the debt is paid semiannually, and the debt will be outstanding for the full 5-year period, at which time it will be repaid. Use Appendix B and Appendix Dfor an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

a. For each plan, compare the net amount of funds initially available—inflow—to the present value of future payments of interest and principal to determine net present value. Assume the stated discount rate is 12 percent annually. Use 6.00 percent semiannually throughout the analysis. (Disregard taxes.)(Assume the $1.20 million needed includes the underwriting costs.  Input your present value of future payments answers as negative values.  Do not round intermediate calculations and round your answers to 2 decimal places.)

 

    Private Placement    Public Issue
  Net amount to Landers $ $
  Present value of future payments    
 
  Net present value $ $
 

 

b. Which plan offers the higher net present value?
   
 
Private placement
Public issue

 

Hint #1

 

15.

value:
2.00 points

 

The Presley Corporation is about to go public. It currently has aftertax earnings of $6,900,000, and 3,200,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 500,000 new shares. The new shares will be priced to the public at $15 per share, with a 6 percent spread on the offering price. There will also be $270,000 in out-of-pocket costs to the corporation.

 

a. Compute the net proceeds to the Presley Corporation. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

 

  Net proceeds $

 

b. Compute the earnings per share immediately before the stock issue. (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Earnings per share $

 

c. Compute the earnings per share immediately after the stock issue. (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Earnings per share $

 

d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

  Rate of return  %

 

e. Determine what rate of return must be earned on the proceeds to the corporation so there will be a 5 percent increase in earnings per share during the year of going public. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

  Rate of return  %

 

 

16.

value:
2.00 points

 

The management of Mitchell Labs decided to go private in 2002 by buying all 2.50 million of its outstanding shares at $19.50 per share. By 2006, management had restructured the company by selling off the petroleum research division for $14.80 million, the fiber technology division for $8.65 million, and the synthetic products division for $22 million. Because these divisions had been only marginally profitable, Mitchell Labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of $1.35 this year. Investment bankers have contacted the firm and indicated that if it reentered the public market, the 2.50 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 14 times earnings per share.

 

a. What was the initial cost to Mitchell Labs to go private? (Do not round intermediate calculations. Round your answer to 2 decimal places. Enter your answer in millions, not dollars (e.g., $1,230,000 should be entered as “1.23”).)

 

  Initial cost $  million

 

b. What is the total value to the company from (1) the proceeds of the divisions that were sold, as well as (2) the current value of the 2.50 million shares (based on current earnings and an anticipated P/E of 14)? (Do not round intermediate calculations. Round your answer to 2 decimal places. Enter your answer in millions, not dollars (e.g., $1,230,000 should be entered as “1.23”).)

 

  Total value to the company $  million

 

c. What is the percentage return to the management of Mitchell Labs from the restructuring? Use answers from parts a and b to determine this value. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

  Percentage return  %

 

 

17.

value:
2.00 points

 

Preston Corporation has a bond outstanding with an annual interest payment of $80, a market price of $1,270, and a maturity date in 9 years. Assume the par value of the bond is $1,000.

 

Find the following: (Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

 

   
  a.    Coupon rate  %
  b.    Current yield  %
  c-1. Approximate yield to maturity  %
  c-2. Exact yield to maturity    %

18.

value:
2.00 points

 

A 15-year, $1,000 par value zero-coupon rate bond is to be issued to yield 9 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

a. What should be the initial price of the bond? (Assume annual compounding. Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Bond price $

 

b. If immediately upon issue, interest rates dropped to 8 percent, what would be the value of the zero-coupon rate bond? (Assume annual compounding. Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Bond price $

 

c. If immediately upon issue, interest rates increased to 11 percent, what would be the value of the zero-coupon rate bond? (Assume annual compounding. Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Bond price $

 

 

19.

value:
2.00 points

 

Assume a zero-coupon bond that sells for $403 will mature in 10 years at $1,250. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

What is the effective yield to maturity? (Assume annual compounding. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 

  Effective yield to maturity  %

 

20.

value:
1.00 points

 

You buy a 6 percent, 15-year, $1,000 par value floating rate bond in 1999. By the year 2014, rates on bonds of similar risk are up to 8 percent.

 

What is your one best guess as to the value of the bond?

 

  Value of the bond $

 

 

 

 

 

21.

value:
1.00 points

 

Seventeen years ago, the Archer Corporation borrowed $6,450,000. Since then, cumulative inflation has been 95 percent (a compound rate of approximately 4 percent per year).

 

a. When the firm repays the original $6,450,000 loan this year, what will be the effective purchasing power of the $6,450,000? (Hint: Divide the loan amount by one plus cumulative inflation.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

 

  Effective purchasing power $

 

b. To maintain the original $6,450,000 purchasing power, how much should the lender be repaid? (Hint: Multiply the loan amount by one plus cumulative inflation.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

 

  Loan repayment $

 

22.

value:
2.00 points

 

A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It currently has 15 years remaining to maturity. Interest rates on similar obligations are now 10 percent. Assume Ms. Bright bought the bond three years ago when it had a price of $1,010. Further assume Ms. Bright paid 40 percent of the purchase price in cash and borrowed the rest (known as buying on margin). She used the interest payments from the bond to cover the interest costs on the loan.

 

a. What is the current price of the bond? Use Table 16-2(Input your answer to 2 decimal places.)

 

  Price of the bond $

 

b. What is her dollar profit based on the bond’s current price? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Dollar profit $

 

c. How much of the purchase price of $1,010 did Ms. Bright pay in cash? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Purchase price paid in cash $

 

d. What is Ms. Bright’s percentage return on her cash investment? Divide the answer to part b by the answer to part c(Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

  Percentage return  %

 

 

 

 

23.

value:
3.00 points

 

A $1,000 par value bond was issued five years ago at a coupon rate of 10 percent. It currently has 10 years remaining to maturity. Interest rates on similar debt obligations are now 12 percent. Use Appendix Band Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

a. Compute the current price of the bond using an assumption of semiannual payments. (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Current bond price $

 

b. If Mr. Robinson initially bought the bond at par value, what is his percentage capital gain or loss?(Ignore any interest income received. Do not round intermediate calculations and input the amount as a positive percent rounded to 2 decimal places.)

 

  Percentage (Click to select) Loss Gain  %

 

c. Now assume Mrs. Pinson buys the bond at its current market value and holds it to maturity, what will be her percentage capital gain or loss? (Ignore any interest income received. Do not round intermediate calculations and input the amount as a positive percent rounded to 2 decimal places.)

 

  Percentage (Click to select) Loss Gain  %

 

d. Why is the percentage gain larger than the percentage loss when the same dollar amounts are involved in parts b and c?
   
 
The percentage gain is larger than the percentage loss because the investment is larger.
The percentage gain is larger than the percentage loss because the investment is smaller.

 

24.

value:
4.00 points

 

The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows: Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

In $ millions In $ millions
  Current assets $  60   Current liabilities $  15
  Fixed assets   60   Long-term liabilities   40
   
             Total liabilities $  55
        Stockholders’ equity   65
       
  Total assets $ 120   Total liabilities and
stockholders’ equity
$ 120
   

 

The footnotes stated that the company had $30 million in annual capital lease obligations for the next 25 years.

 

a. Discount these annual lease obligations back to the present at a 12 percent discount rate. (Do not round intermediate calculations. Round your answer to the nearest million. Input your answer in millions of dollars (e.g., $6,100,000 should be input as “6”).)

 

  PV of lease obligations $  million

 

b. Construct a revised balance sheet that includes lease obligations. (Do not round intermediate calculations. Round your answers to the nearest million. Input your answer in millions of dollars (e.g., $6,100,000 should be input as “6”).)

 

Balance Sheet (In $ millions)
  Current assets $   Current liabilities $
  Fixed assets     Long-term liabilities  
  Leased property
under capital lease
    Obligations under
capital lease
 
   
      Total liabilities $
      Stockholders’ equity  
     
  Total assets $   Total liabilities and
Stockholders’ equity
$
   

 

c. Compute the total debt to total asset ratio for the original and revised balance sheets. (Input your answers as a percent rounded to 2 decimal places.)

 

   
  Original  %
  Revised  %

 

d. Compute the total debt to total equity ratio for the original and revised balance sheets. (Input your answers as a percent rounded to 2 decimal places.)

 

   
  Original  %
  Revised  %

 

e. In an efficient capital market environment, should the consequences of SFAS No. 13, as viewed in the answers to parts c and d, change stock prices and credit ratings?
   
 
Yes
No

 

 

25.

value:
4.00 points

 

The Hardaway Corporation plans to lease a $810,000 asset to the O’Neil Corporation. The lease will be for 11 years. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

a. If the Hardaway Corporation desires a return of 13 percent on its investment, how much should the lease payments be? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

  Lease payment $

 

b. If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of $810,000 and will pass the benefits along to the O’Neil Corporation in the form of lower lease payments (related to the Hardaway Corporation in the form of lower initial net cost), how much should the revised lease payments be? The Hardaway Corporation desires a return of 13 percent on the 11-year lease. (Do not round intermediate calculations and round your answer to 2 decimal places.)