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1. American Health Systems currently has 5,200,000 shares of stock outstanding and will report earnings of $18 million in the current year. The company is considering the issuance of 1,800,000...

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1. American Health Systems currently has 5,200,000 shares of stock outstanding and will report earnings of $18 million in the current year. The company is considering the issuance of 1,800,000 additional shares that will net $50 per share to the corporation.

What is the immediate dilution potential for this new stock issue?

Dilution __________________ per share

Assume that American Health Systems can earn 11% on the proceeds of the stock issue in time to include them in the current year’s results. Calculate earnings per share.

Earnings per share ___________________

Should the new issue be undertaken based on earnings per share?

Yes _____________No _______________

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

Size of Offer Public Price Net to Corporation

$1.8 million $41 $37.70

8.0 million XXXXXXXXXX

XXXXXXXXXX

What is the percentage underwriting spread for each size offer?

Size of offer Underwriting Spread

1.9 million _________________%

8 million _________________%

31 million _________________%

3. The Wrigley Corp. needs to raise $38 million. The investment banking firm pf Tinker, Evers & Chance will handle the transaction.

If stock utilized, 1.900,000 shares will be sold to the public at $21.00 per share. The corporation will receive a net price of $20.00 per share. What is the percentage underwriting spread per share?

Underwriting spread per share _______________%

If bonds are utilized, slightly over 38,000 bonds will be sold to the public at $1,010 per bond. The corporation will receive a net price of $996 per bond. What is the percentage of underwriting spread per bond?

Underwriting spread per share __________________%

Which alternative has the larger percentage of spread? Stock ________Bond __________

Is this the normal relationship between the two types of issues? Yes ______ No_________

Kevin’s Company has earnings of $7 million with 2,200,000 shares outstanding before distribution. 600,000 shares will be included in the sale, of which 500,000 are new corporation shares and 100,000 are shares currently owned by Ann Fry, the founder and CEO. The 100,000 shares that Ann is selling are referred to as a secondary offering and all proceeds will go to her. Net price from the offering will be $16.50 and the corporation proceeds are expected to produce $1.4 million in corporate earnings.

What were the corporation’s earnings per share before the offering?

Earnings per share _______________

What are the corporation’s earnings per share expected to be after the offering?

Earnings per share _______________

4. Becker Brothers is the managing underwriter for a 1.20 million share issue by Jay’s Hamburger Heaven. Becker Brothers is handling 12% of the issue. Its price is $21 per share and the price to the public is $22.85.

Becker also provides the market stabilization function. During the issuance, the market for the stock turned soft and Becker is forced to purchase 45,000 shares in the open market at an average price of $21.55. They later sell the shares at an average value of $21.20.

Compute Becker Brothers’ overall gain or loss from managing the issue. _______________

5. The investment banking firm of Einstein & Co will use a dividend valuation model to appraise the shares of the Modern Physics Corp. Dividends (D1) at the end of the current year will e $1.54. The growth rat (g) is 9% and the discount rate (Ke) is 13%.

What should be the price of the stock to the public? Price of stock_____________

If there is a 5% total underwriting spread on the stock, how much will the issuing corporation receive? Net price to the corporation ______________

If the issuing corporation requires a net price of $37.00 and there is a 5% underwriting spread, what should be the price of the stock to the public? Necessary public price _______________.

The Landers Corporation needs to raise $1.90 million of debt on a 20-year issue. If t places the bonds privately, the interest rate will be 12%. Forty thousand dollars in out-of-pocket cost will be incurred. For a public issue, the interest rate will be 11% and the underwriting spread will be 4%. There will be $140,000 in out-of-pocket cost. Assume interest on the debt is paid semiannually and the debt will be outstanding for the full 20-year period at which time it will be repaid.

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 14% annually. Use 7.00% semiannually throughout the analysis (disregard taxes).

Private Placement

Public Issue

Net amount to Landers

Present value of future payments

Net present value

Which plan offers the higher net present value?

Private placement ___________________ Public Placement _____________

6. The Presley Corporation is about to go public. It currently has aftertax earnings of $7,000,000 and 3,100,000 shares are owned by the present stockholders (the Presley Family). The new public issue will represent 600,000 new shares. The new shares will be priced to the public at $25 per share with a 5% spread on the offering price. There will also be $230,000 in out-of-pocket cost to the corporation.

Compute the net proceeds to the Presley Corporation. ________________________

Compute the earnings per share immediately before the stock issue. _____________

Compute the earnings per share immediately after the stock issue. ______________

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. _______________

Determine what rate of return must be earned on the proceeds to the corporation so there will be a 5% increase n earnings per share during the year of going public ____________________

7. The management of Mitchell Labs decided to go private in 2002 by buying all 2.60 million of its outstanding shares at $19.80 per share. By 2006, management had restricted to company by selling off the petroleum research division for $14.50 million, the fiber technology division for $8.90 million, and the synthetic products division for $19 million. Because these divisions had been only marginally profitable, Mitchell Labs is a stronger company after the restricting. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of $1.25 this year. Investment bankers have contacted the firm and indicated that if it reentered the public market the 2.60 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 12 times earnings per share.

What was the initial cost to Mitchell Labs to go private?

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 2.60 million shares.

What is the percentage return to the management of Mitchell Labs from the restructuring?

8. Preston Corp has a bond outstanding with an annual interest payment of $80. A market price of $1270 and a maturity date in 9 years. Assume the par value of the bond is $1000.

Find the following:

a.

Coupon rate

%

b

Current yield

c-1

Approximate yield to maturity

c-2

Exact yield to maturity

9. A 15-year $1,000 par value zero-coupon rate bond is to be issued to yield 8%.

What should be the initial price of the bond? _________________________

If immediately upon issue, interest rates dropped to 7% what would be the value of the zero-coupon rate bond? ____________________

If immediately upon issue, interest rates increased to 10%, what would be the value of the zero-coupon rate bond? ___________________________

10. Assume a zero-coupon bond that sells for $147 will mature in 25 years at $1600.

What is the effective yield to maturity? _________________________

11. You buy a 12%, 15-year, $1000 par value floating rate bond in 1999. By the year 2014 rates on bonds of similar risk are up to 14%.

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

12. Fifteen years ago, the Archer Corporation borrowed $6,300,000. Since then cumulative inflation has been 56% (a compound rate of approximately 3 percent per year).

When the firm repays the original $6,300,000 loan this year, what will be the effective purchasing power of the $6,300,000. ________________________

To maintain the original $6,300,000 purchasing power, how much should the lender be repaid?

Loan repayment ________________________

13. A $1,000 par value bond was issued 39 years ago at a 12% coupon rate. It currently has 25 years remaining to maturity. Interest rates on similar obligations are now 10%. Assume Ms. Bright bought the bond three years ago when it had a price of $1,050. Further assume Ms. Bright paid 30% 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 cost on the loan.

a. What is the current price of the bond? _____________________

b. What is her dollar profit based on the bond’s current price? ______________________

c. How much of the purchase price of $1,050 did Ms. Bright pay in cash? _______________

d. What is Ms. Bright’s percentage return on her cash interest? Divide the answer to part b by the answer to part c.

14. A $1,000 par value bond was issued five years ago at a coupon rate of 12%. It currently has 25 years remaining to maturity. Interest rates on similar debt obligations are now 14%.

a. Compute the current price of bond using an assumption of semiannual payments Current bond price_______________.

b. If Mr. Robinson initially bought the bond at par value, what is his percentage capital gain loss?

Percentage _________________________

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? Percentage _________________________

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.

Original

%

Revised

%

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

_____________Yes

_____________No

15. 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:

In $ millions In $ millions

Current assets $55 Current liabilities $10

Fixed assets $55 Long-term liabilities 35

Total liabilities $45

Stockholders’ equity $65

Total assets $110 Total liabilities and stockholders’ equity $110

The footnotes stated that the company had $21 million in annual capital lease obligations for the next 20 years.

Discount these annual lease obligations back to the present at a 10% discount rate.

PV of lease obligations ____________________________million

Construct a revised balance sheet that includes lease obligations

Balance Sheet (in millions)

Current assets

Current liabilities

Fixed assets

Long-term liabilities

Leased property under capital lease

Obligations under capital lease

Total liabilities and Stockholders’ equity

Total Assets

Total liabilities and Stockholders’ equity

Compute the total debt to total asset ratio for the original and revised balance sheets.

Original ______________________%

Revised ______________________%

Compute the total debt to total equity ratio for the original and revised balance sheets.

16. The Hardaway Corp. plans to lease a $820,000 asset to the O’Neil Corp. The lease will be for 12 years.

If the Hardaway Corp desires a return of 14 percent on its investment, how much should the lease payments be? Lease payment __________________

If the Hardaway Corp is able to take a 10% deduction from the purchase price of $820,000 and will pass the benefits along to the O’Neil Corp. in the form of lower lease payments, how much should the revised lease payments be? The Hardaway Corporation desires a return of 14% on the 12-year lease.

Revised lease payment________________________

Answered Same Day Jul 06, 2020

Solution

Ashish answered on Jul 09 2020
128 Votes
1. American Health Systems cu
ently has 5,200,000 shares of stock outstanding and will report earnings of $18 million in the cu
ent year. The company is considering the issuance of 1,800,000 additional shares that will net $50 per share to the corporation.
What is the immediate dilution potential for this new stock issue?
Dilution __________________ per share
Solution-
Earnings per share before stock issue = $18,000,000 / 5,200,000
Earnings per share before stock issue = $3.46
Earnings per share after stock issue = $18,000,000 / (5,200,000+1,800,000)
Earnings per share after stock issue = $2.57
Dilution = Earnings per share before stock issue / Earnings per share after stock issue
Dilution = $3.46 / $2.57
Dilution = $1.35
Assume that American Health Systems can earn 11% on the proceeds of the stock issue in time to include them in the cu
ent year’s results. Calculate earnings per share.
Earnings per share ___________________
Solution-
Net Income = $18,000,000 + .11*(1,800,000*$50)
Net Income = $27,900,000
Earnings per share after additional income = $27,900,000 / (5,200,000+1,800,000)
Earnings per share after additional income = $3.99
Should the new issue be undertaken based on earnings per share?
Yes _____________No _______________
Solution-
Yes
2. Assume Sybase Software is thinking about three different size offerings for issuance of additional shares.
Size of Offe
Public Price
Net to Corporation
$1.8 million
$41
$37.70
8.0 million
41
38.28
31.0
41
39.50
What is the percentage underwriting spread for each size offer?
Size of offe
Underwriting Spread
1.9 million
______8.05______%
8 million
_____6.63______%
31 million
______3.66______%
Solution-
Underwriting Spread = ($41 - $37.70)/ $41
Underwriting Spread = 8.05%
Underwriting Spread = ($41 - $38.28)/ $41
Underwriting Spread = 6.63%
Underwriting Spread = ($41 - $39.5)/ $41
Underwriting Spread = 3.66%
3. The Wrigley Corp. needs to raise $38 million. The investment banking firm pf Tinker, Evers & Chance will handle the transaction.
If stock utilized, 1.900,000 shares will be sold to the public at $21.00 per share. The corporation will receive a net price of $20.00 per share. What is the percentage underwriting spread per share?
Underwriting spread per share _______________%
Solution-
Underwriting Spread = ($21 - $20)/ $21
Underwriting Spread = 4.76%
If bonds are utilized, slightly over 38,000 bonds will be sold to the public at $1,010 per bond. The corporation will receive a net price of $996 per bond. What is the percentage of underwriting spread per bond?
Underwriting spread per share __________________%
Solution-
Underwriting Spread = ($1,010 - $996)/ $1,010
Underwriting Spread = 1.39%
Which alternative has the larger percentage of spread? Stock ________Bond __________
Solution-
Stock
Is this the normal relationship between the two types of issues? Yes ______ No_________
Solution-
Yes
Kevin’s Company has earnings of $7 million with 2,200,000 shares outstanding before distribution. 600,000 shares will be included in the sale, of which 500,000 are new corporation shares and 100,000 are shares cu
ently owned by Ann Fry, the founder and CEO. The 100,000 shares that Ann is selling are refe
ed to as a secondary offering and all proceeds will go to her. Net price from the offering will be $16.50 and the corporation proceeds are expected to produce $1.4 million in corporate earnings.
What were the corporation’s earnings per share before the offering?
Earnings per share _______________
Solution-
Earnings per share before the stock issue:
EPS = $7,000,000 / 2,200,000
EPS = $3.18
What are the corporation’s earnings per share expected to be after the offering?
Earnings per share _______________
Solution-
Earnings per share after the stock issue:
EPS = ($7,000,000 + 1,400,000) / (2,200,000 + 500,000)
EPS = $3.11
4. Becker Brothers is the managing underwriter for a 1.20 million share issue by Jay’s Hamburger Heaven. Becker Brothers is handling 12% of the issue. Its price is $21 per share and the price to the public is $22.85.
Becker also provides the market stabilization function. During the issuance, the market for the stock turned soft and Becker is forced to purchase 45,000 shares in the open market at an average price of $21.55. They later sell the shares at an average value of $21.20.
Compute Becker Brothers’ overall gain or loss from managing the issue. _______________
Solution-
Spread = (.12 *1,200,000)*($22.85 − 21)
Spread = $266,400
Stabilization = 45,000*($21.20 – 21.55)
Stabilization = −$15,750
Net gain = $266,400 − 15,750
Net gain = $250,650
5. The investment banking firm of Einstein & Co will use a dividend valuation model to appraise the shares of the Modern Physics Corp. Dividends (D1) at the end of the cu
ent year will e $1.54. The growth rat (g) is 9% and the discount rate (Ke) is 13%.
What should be the price of the stock to the public? Price of stock_____________
Solution-
P0 = D1 / (Ke – g)
P0 = $1.54 / (.13 – .09)
P0 = $38.5
If there is a 5% total underwriting spread on the stock, how much will the issuing corporation receive? Net price to the corporation ______________
Solution-
Net price = Public price *(1 – Spread)
Net price = $38.50*(1 – .05)
Net price = $36.58
If the issuing corporation requires a net price of $37.00 and there is a 5% underwriting spread, what should be the price of the stock to the public? Necessary public price _______________.
Solution-
Public price = Net price / (1 – Spread)
Public price = $37 / (1 – .05)
Public...
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