BUSI 320 connect homework 7 solutions complete answers

BUSI 320 connect homework 7 solutions complete answers 

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Krawczek Company will enter into a lease agreement with Heavy Equipment Co. where Krawczek will make lease payments over the next five years. The lease is cancelable and requires equal annual payments of $23,200 per year beginning on January 1 of the first year. The last payment will be January 1 of year 5, and Krawczek will continue to use the asset until December 31 of that year. Other important information includes the following:

 

A $1,000 par value bond was issued five years ago at a 12 percent coupon rate. It currently has 15 years remaining to maturity. Interest rates on similar debt obligations are now 14 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It currently has 25 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 $1,030. 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.

 

Fifteen years ago, the Archer Corporation borrowed $6,250,000. Since then, cumulative inflation has been 80 percent (a compound rate of approximately 4 percent per year).
 

a. When the firm repays the original $6,250,000 loan this year, what will be the effective purchasing power of the $6,250,000? (Hint: Divide the loan amount by one plus cumulative inflation.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

 

Assume a zero-coupon bond that sells for $383 and will mature in 20 years at $2,150. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

A 15-year, $1,000 par value zero-coupon rate bond is to be issued to yield 10 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

Preston Corporation has a bond outstanding with an annual interest payment of $80, a market price of $1,290, and a maturity date in 10 years. Assume the par value of the bond is $1,000.

 

The management of Mitchell Labs decided to go private in 2002 by buying all 2.80 million of its outstanding shares at $25.40 per share. By 2006, management had restructured the company by selling off the petroleum research division for $10.80 million, the fiber technology division for $9.10 million, and the synthetic products division for $18 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 $1.50 this year. Investment bankers have contacted the firm and indicated that if it reentered the public market, the 2.80 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 13 times earnings per share.

 

The Landers Corporation needs to raise $1.60 million of debt on a 5-year issue. If it places the bonds privately, the interest rate will be 10 percent. Thirty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 11 percent, and the underwriting spread will be 2 percent. There will be $140,000 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 D for 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 16 percent annually. Use 8.00 percent semiannually throughout the analysis. (Disregard taxes.) (Assume the $1.60 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.)

 

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 $1.80. The growth rate (g) is 8 percent and the discount rate (Ke) is 12 percent.

 

Becker Brothers is the managing underwriter for a 1.35-million-share issue by Jay’s Hamburger Heaven. Becker Brothers is “handling” 9 percent of the issue. Its price is $26 per share, and the price to the public is $27.50.


Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 40,000 shares in the open market at an average price of $26.25. It later sells the shares at an average value of $26.15.

 

Kevin’s Bacon Company Inc. has earnings of $5 million with 2,500,000 shares outstanding before a public distribution. Four hundred thousand shares will be included in the sale, of which 200,000 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 $19.50 and the corporate proceeds are expected to produce $1.1 million in corporate earnings.

 

The Wrigley Corporation needs to raise $24 million. The investment banking firm of Tinkers, Evers & Chance will handle the transaction.


a. If stock is utilized, 2,100,000 shares will be sold to the public at $12.25 per share. The corporation will receive a net price of $11.50 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.)

 

b. If bonds are utilized, slightly over 24,150 bonds will be sold to the public at $1,003 per bond. The corporation will receive a net price of $998 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.)

 

American Health Systems currently has 5,600,000 shares of stock outstanding and will report earnings of $17 million in the current year. The company is considering the issuance of 1,300,000 additional shares that will net $40 per share to the corporation.

 

Which of the following was NOT a major supplier of funds to credit markets in 2008?

 

Of the following efficient market hypotheses, researchers have stated that the __________ market is not efficient.

 

Question

Krawczek Company will enter into a lease agreement with Heavy Equipment Co. where Krawczek will make lease payments over the next five years. The lease is cancelable and requires equal annual payments of $25,600 per year beginning on January 1 of the first year. The last payment will be January 1 of year 5, and Krawczek will continue to use the asset until December 31 of that year. Other important information includes the following:

 

The fair value of the equipment is $175,000.

 

The applicable discount rate is an 8 percent annual rate.

 

The economic life of the asset is 10 years.

 

Krawczek does not guarantee the residual value of the asset at the end of the lease, and it does not expect to keep the asset at the end of the term.

 

The asset is a standard piece of equipment.

 

a. Is the lease an operating lease or a financing lease?

 

b. What will be the lease expense shown on the income statement at the end of year 1?

 

c. What will be the interest expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

 

d. What will be the amortization expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

 

Question

The Harris Company is the lessee on a four-year lease with the following payments at the end of each year:

 

An appropriate discount rate is 7 percentage, yielding a present value of $84,943.

 

a-1. If the lease is an operating lease, what will be the initial value of the right-of-use asset?

 

a-2. If the lease is an operating lease, what will be the initial value of the lease liability?

 

a-3. If the lease is an operating lease, what will be the lease expense shown on the income statement at the end of year 1?

 

a-4. If the lease is an operating lease, what will be the interest expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

 

a-5. If the lease is an operating lease, what will be the amortization expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

 

b-1. If the lease is a finance lease, what will be the initial value of the right-of-use asset?

 

b-2. If the lease is a finance lease, what will be the initial value of the lease liability?

 

b-3. If the lease is a finance lease, what will be the lease expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

 

b-4. If the lease is a finance lease, what will be the interest expense shown on the income statement at the end of year 1? (Round your answer to the nearest dollar amount.)

 

b-5. If the lease is a finance lease, what will be the amortization expense shown on the income statement at the end of year 1? (Round your answer to the nearest dollar amount.)

 

 

Question 1
Which of the following is not a money market instrument?
 

Question 2
During the next several years, the major threat to the dominance of the U.S. money and capital markets is expected to come from
 

Question 3
Federally sponsored credit agencies include all but which of the following?
 

Question 4
Which of the following is an internal source of funds?
 

Question 5
Which of the following is not an example of indirect investment by a household?
 

Question 6
Security markets provide liquidity
 

Question 7
Of the following efficient market hypotheses, researchers have stated that markets are somewhat efficient in the  ____________ sense. 
 

Question 8
American Health Systems currently has 6,300,000 shares of stock outstanding and will report earnings of $18 million in the current year. The company is considering the issuance of 1,100,000 additional shares that will net $50 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.)

 

b-1. Assume that American Health Systems can earn 12 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.)

 

b-2. Should the new issue be undertaken based on earnings per share?

 

Question 9
Assume Sybase Software is thinking about three different size offerings for issuance of additional shares.
 

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.)

 

Question 10
The Wrigley Corporation needs to raise $37 million. The investment banking firm of Tinkers, Evers & Chance will handle the transaction.
 

a. If stock is utilized, 1,700,000 shares will be sold to the public at $23.80 per share. The corporation will receive a net price of $22.00 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.)

 

b. If bonds are utilized, slightly over 37,400 bonds will be sold to the public at $1,003 per bond. The corporation will receive a net price of $998 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.)

 

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

 

c-2. Is this the normal relationship between the two types of issues?

 

Question 11
Kevin’s Bacon Company Inc. has earnings of $5 million with 2,400,000 shares outstanding before a public distribution. Six hundred thousand shares will be included in the sale, of which 300,000 are new corporate shares, and 300,000 are shares currently owned by Ann Fry, the founder and CEO. The 300,000 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 $19.50 and the corporate proceeds are expected to produce $1.5 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.)

 

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.)

 

Question 12
Becker Brothers is the managing underwriter for a 1.75-million-share issue by Jay’s Hamburger Heaven. Becker Brothers is “handling” 7 percent of the issue. Its price is $27 per share and the price to the public is $29.20.
 

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 $28.30. They later sell the shares at an average value of $28.00.

 

Compute Becker Brothers’ overall gain or loss from managing the issue. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

 

Question 13
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 6 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.)

 

b. If there is a 5 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.)

 

c. If the issuing corporation requires a net price of $36.00 (proceeds to the corporation) and there is a 5 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.)

 

Question 14
The Landers Corporation needs to raise $2.20 million of debt on a 25-year issue. If it places the bonds privately, the interest rate will be 16 percent. Thirty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 15 percent, and the underwriting spread will be 3 percent. There will be $80,000 in out-of-pocket costs. Assume interest on the debt is paid semiannually, and the debt will be outstanding for the full 25-year period, at which time it will be repaid. Use Appendix B and Appendix D for 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 18 percent annually. Use 9.00 percent semiannually throughout the analysis. (Disregard taxes.) (Assume the $2.20 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.)

 

b. Which plan offers the higher net present value?

 

Question 15
The Presley Corporation is about to go public. It currently has aftertax earnings of $7,100,000, and 3,000,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 700,000 new shares. The new shares will be priced to the public at $35 per share, with a 4 percent spread on the offering price. There will also be $240,000 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.)

 

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

 

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

 

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.)

 

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.)

 

Question 16
The management of Mitchell Labs decided to go private in 2002 by buying all 2.40 million of its outstanding shares at $19.80 per share. By 2006, management had restructured the company by selling off the petroleum research division for $11.80 million, the fiber technology division for $8.40 million, and the synthetic products division for $21 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 $1.40 this year. Investment bankers have contacted the firm and indicated that if it reentered the public market, the 2.40 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").)

 

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 2.40 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").)

 

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.)

 

Question 17
Preston Corporation has a bond outstanding with an annual interest payment of $90, a market price of $1,280, and a maturity date in 7 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.)

 

Question 18
A 18-year, $1,000 par value zero-coupon rate bond is to be issued to yield 10 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.)

 

b. If immediately upon issue, interest rates dropped to 9 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.)

 

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.)

 

Question 19
Assume a zero-coupon bond that sells for $478 will mature in 15 years at $2,000. 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.)

 

Question 20
You buy a 7 percent, 20-year, $1,000 par value floating rate bond in 1999. By the year 2014, rates on bonds of similar risk are up to 9 percent.
 

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

 

Question 21
Fourteen years ago, the Archer Corporation borrowed $6,150,000. Since then, cumulative inflation has been 73 percent (a compound rate of approximately 4 percent per year).
 

a. When the firm repays the original $6,150,000 loan this year, what will be the effective purchasing power of the $6,150,000? (Hint: Divide the loan amount by one plus cumulative inflation.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

 

b. To maintain the original $6,150,000 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.)

 

Question 22
A $1,000 par value bond was issued 20 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 $1,030. Further assume Ms. Bright paid 30 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.)

 

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.)

 

c. How much of the purchase price of $1,030 did Ms. Bright pay in cash? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

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.)

 

Question 23
A $1,000 par value bond was issued five years ago at a coupon rate of 10 percent. It currently has 20 years remaining to maturity. Interest rates on similar debt obligations are now 12 percent. Use Appendix B and 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.)

 

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.)

 

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.)

 

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

 

Question 24
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.  
 

The footnotes stated that the company had $16 million in annual capital lease obligations for the next 15 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").)

 

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").)

 

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.)

 

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.)

 

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?

 

Question 25
The Hardaway Corporation plans to lease a $730,000 asset to the O’Neil Corporation. The lease will be for 10 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 12 percent on its investment, how much should the lease payments be? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

b. If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of $730,000 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 12 percent on the 10-year lease. (Do not round intermediate calculations and round your answer to 2 decimal places.)