$19.90
BUSI 320 Quiz 4 Long Term Financing solutions complete answers
BUSI 320 Quiz 4 Long Term Financing solutions complete answers
Select the correct yield to maturity for each security provision. Higher returns tend to go with greater risk.
Worst Buy Company has had a lot of complaints from customers of late, and its stock price is now only $5 per share. It is going to employ a one-for-six reverse stock split to increase the stock value. Assume Dean Smith owns 144 shares.
Ralston Gourmet Foods Inc. earned $175 million last year and retained $145 million.
A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 19 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 32 percent and will eventually reach 56 percent during the maturity stage (IV).
Mr. Meyers wishes to know how many shares are necessary to elect 6 directors out of 14 directors up for election in the Austin Power Company. There are 93,000 shares outstanding. (Do not round intermediate calculations.)
Katie Homes and Garden Co. has 13,900,000 shares outstanding. The stock is currently selling at $64 per share. If an unfriendly outside group acquired 25 percent of the shares, existing stockholders will be able to buy new shares at 30 percent below the currently existing stock price.
Enterprise Storage Company has 500,000 shares of cumulative preferred stock outstanding, which has a stated dividend of $9.50. It is six years in arrears in its dividend payments. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
The company anticipates earnings per share after four years will be $4.15 with a P/E ratio of 16.
The common stock will be valued as the present value of future dividends plus the present value of the future stock price after four years. The discount rate used by the investment banker is 11 percent.
Betsy Ross owns 924 shares in the Hanson Fabrics Company. There are 14 directors to be elected, and 33,000 shares outstanding. The firm has adopted cumulative voting.
Assume a zero-coupon bond that sells for $671 and will mature in 10 years at $1,450. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
You buy a 6 percent, 15-year, $1,000 par value floating rate bond in 1999. By the year 2004, rates on bonds of similar risk are up to 8 percent.
Bond A pays $100 annual interest and has a market value of $870. It has 13 years to maturity.
Bond B pays $105 annual interest and has a market value of $950. It has two years to maturity.
Seventeen years ago, the Archer Corporation borrowed $6,500,000. Since then, cumulative inflation has been 65 percent (a compound rate of approximately 3 percent per year).
a. When the firm repays the original $6,500,000 loan this year, what will be the effective purchasing power of the $6,500,000? (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 $6,500,000 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.)
Bond X pays $84 annual interest and has a market value of $900. It has 12 years to maturity.
Bond Z pays $86 annual interest and has a market value of $770. It has four years to maturity.
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.
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.
American Health Systems currently has 5,800,000 shares of stock outstanding and will report earnings of $18 million in the current year. The company is considering the issuance of 1,400,000 additional shares that will net $20 per share to the corporation.
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.)
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 $1.60. The growth rate (g) is 8 percent and the discount rate (Ke) is 11 percent.
b. If there is a 4 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 $51.83 (proceeds to the corporation) and there is a 4 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
An investor must choose between two bonds:
Bond A pays $70 annual interest and has a market value of $750. It has 12 years to maturity.
Bond B pays $75 annual interest and has a market value of $840. It has four years to maturity.
Assume the par value of the bonds is $1,000.
a. Compute the current yield on both bonds. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
b. Which bond should she select based on your answers to part a?
c. A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond A is 10.69 percent. What is the approximate yield to maturity on Bond B? The exact yield to maturity? (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.)
d. Has your answer changed between parts b and c of this question in terms of which bond to select?
Question
Which of the following is not a money market instrument?
Question
Security markets provide liquidity
Question
Of the following efficient market hypotheses, researchers have stated that markets are somewhat efficient in the ____________ sense.
Question
Which of the following is not an example of indirect investment by a household?
Question
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
The Pioneer Petroleum Corporation has a bond outstanding with an $70 annual interest payment, a market price of $860, and a maturity date in four 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
Harold Reese must choose between two bonds:
Bond X pays $70 annual interest and has a market value of $845. It has 10 years to maturity.
Bond Z pays $60 annual interest and has a market value of $870. It has five years to maturity.
Assume the par value of the bonds is $1,000.
a. Compute the current yield on both bonds. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
b. Which bond should he select based on your answers to part a?
c. A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond X is 9.43 percent. What is the approximate yield to maturity on Bond Z? The exact yield to maturity? (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.)
d. Has your answer changed between parts b and c of this question?
Question
Cox Media Corporation pays a coupon rate of 8 percent on debentures that are due in 15 years. The current yield to maturity on bonds of similar risk is 6 percent. The bonds are currently callable at $1,080. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a. Find the market value of the bonds using semiannual analysis. (Ignore the call price in your answer. Do not round intermediate calculations and round your answer to 2 decimal places.)
b. Do you think the bonds will sell for the price you arrived at in part a?
Question
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.)
Question
Katie Homes and Garden Co. has 14,700,000 shares outstanding. The stock is currently selling at $80 per share. If an unfriendly outside group acquired 15 percent of the shares, existing stockholders will be able to buy new shares at 20 percent below the currently existing stock price.
a. How many shares must the unfriendly outside group acquire for the poison pill to go into effect? (Do not round intermediate calculations.)
b. What will be the new purchase price for the existing stockholders? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Question
Mr. Meyers wishes to know how many shares are necessary to elect 2 directors out of 9 directors up for election in the Austin Power Company. There are 94,000 shares outstanding. (Do not round intermediate calculations.)
Question
Betsy Ross owns 987 shares in the Hanson Fabrics Company. There are 13 directors to be elected, and 43,500 shares outstanding. The firm has adopted cumulative voting.
a. How many total votes can be cast? (Do not round intermediate calculations and round your answer to the nearest whole number.)
b. How many votes does Betsy control? (Do not round intermediate calculations and round your answer to the nearest whole number.)
c. What percentage of the total votes does she control? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Question
Midland Petroleum is holding a stockholders’ meeting next month. Ms. Ramsey is the president of the company and has the support of the existing board of directors. All 13 members of the board are up for reelection. Mr. Clark is a dissident stockholder. He controls proxies for 35,001 shares. Ms. Ramsey and her friends on the board control 55,001 shares. Other stockholders, whose loyalties are unknown, will be voting the remaining 33,998 shares. The company uses cumulative voting.
a. How many directors can Mr. Clark be sure of electing? (Do not round intermediate calculations. Round down your answer to the nearest whole number.)
b. How many directors can Ms. Ramsey and her friends be sure of electing? (Do not round intermediate calculations. Round down your answer to the nearest whole number.)
c-1. How many directors could Mr. Clark elect if he obtains all the proxies for the uncommitted votes? (Do not round intermediate calculations. Round down your answer to the nearest whole number.)
c-2. Will he control the board?
d. If nine directors were to be elected, and Ms. Ramsey and her friends had 63,001 shares and Mr. Clark had 43,001 shares plus half the uncommitted votes, how many directors could Mr. Clark elect? (Do not round intermediate calculations. Round down your answer to the nearest whole number.)
Question
Rust Pipe Co. was established in 1994. Four years later the company went public. At that time, Robert Rust, the original owner, decided to establish two classes of stock. The first represents Class A founders' stock and is entitled to eight votes per share. The normally traded common stock, designated as Class B, is entitled to one vote per share. In late 2010, Mr. Stone, an investor, was considering purchasing shares in Rust Pipe Co. While he knew the existence of founders’ shares were not often present in other companies, he decided to buy the shares anyway because of a new technology Rust Pipe had developed to improve the flow of liquids through pipes.
Of the 1,400,000 total shares currently outstanding, the original founder's family owns 51,725 shares.
What is the percentage of the founder's family votes to Class B votes? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Question
Mr. and Mrs. Anderson own five shares of Magic Tricks Corporation's common stock. The market value of the stock is $78. The Andersons also have $66 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $66 for each five shares currently owned (based on five rights). (Do not round intermediate calculations and round your answers to the nearest whole dollar.)
a. What is the value of a right?
b. What is the value of the Andersons’ portfolio before the rights offering? (Portfolio in this question represents stock plus cash.)
c-1. Compute the diluted value (ex-rights) per share.
c-2. If the Andersons participate in the rights offering, what will be the value of their portfolio, based on the diluted value (ex-rights) of the stock?
d. If they sell their two rights but keep their stock at its diluted value and hold on to their cash, what will be the value of their portfolio?
Question
Walker Machine Tools has 7.4 million shares of common stock outstanding. The current market price of Walker common stock is $90 per share rights-on. The company’s net income this year is $27.00 million. A rights offering has been announced in which 740,000 new shares will be sold at $84.50 per share. The subscription price plus twelve rights is needed to buy one of the new shares.
a. What are the earnings per share and price-earnings ratio before the new shares are sold via the rights offering? (Do not round intermediate calculations and round your answers to 2 decimal places.)
b. What would the earnings per share be immediately after the rights offering? What would the price-earnings ratio be immediately after the rights offering? (Assume there is no change in the market value of the stock, except for the change when the stock begins trading ex-rights.) (Do not round intermediate calculations and round your answers to 2 decimal places.)
Question
Enterprise Storage Company has 650,000 shares of cumulative preferred stock outstanding, which has a stated dividend of $5.30. It is six years in arrears in its dividend payments. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a. How much in total dollars is the company behind in its payments? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)
b. The firm proposes to offer new common stock to the preferred stockholders to wipe out the deficit.
The common stock will pay the following dividends over the next four years:
The company anticipates earnings per share after four years will be $4.30 with a P/E ratio of 19.
The common stock will be valued as the present value of future dividends plus the present value of the future stock price after four years. The discount rate used by the investment banker is 10 percent.
Compute the value of the common stock. (Do not round intermediate calculations and round your answer to 2 decimal places.)
c. How many shares of common stock must be issued at the value computed in part b to eliminate the deficit (arrearage) computed in part a? (Do not round intermediate calculations and round your answer to the nearest whole share.)
Question
Ralston Gourmet Foods Inc. earned $155 million last year and retained $135 million.
What is the payout ratio? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Question
Polycom Systems earned $551 million last year and paid out 22 percent of earnings in dividends.
a. By how much did the company’s retained earnings increase? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)
b. With 100 million shares outstanding and a stock price of $145, what was the dividend yield? (Hint: First compute dividends per share.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Question
The following companies have different financial statistics.
a. What dividend policy would you recommend for Turtle Co.?
b. What dividend policy would you recommend for Hare Corp.?
Question
Planetary Travel Co. has $158,000,000 in stockholders’ equity. Common stock is $50,000,000 and the balance is retained earnings. The firm has $320,000,000 in total assets and 4 percent of this value is in cash. Earnings for the year are $21,000,000 and are included in retained earnings.
a. What is the legal limit on current dividends? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)
b. What is the practical limit based on liquidity? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)
c. If the company pays out the amount in part b, what is the dividend payout ratio? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Question
A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 10 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 31 percent and eventually reach 52 percent during the maturity stage (IV).
a. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during each stage. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places.)
b. Assume in Stage IV that an investor owns 330 shares and is in a 15 percent tax bracket. What will be the investor’s aftertax income from the cash dividend? (Do not round intermediate calculations and round your answer to 2 decimal places.)
c. In what two stages is the firm most likely to utilize stock dividends or stock splits? (Select two answers. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)
Question
Squash Delight Inc. has the following balance sheet:
The firm’s stock sells for $9 a share.
a. Show the effect on the capital accounts of a two-for-one stock split. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)
b. Show the effect on the capital accounts of a 10 percent stock dividend. Part b is separate from part a. In part b do not assume the stock split has taken place. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)
c. Based on the balance in retained earnings, which of the two dividend plans is more restrictive on future cash dividends?
Question
In doing a five-year analysis of future dividends, the Dawson Corporation is considering the following two plans. The values represent dividends per share. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a. How much in total dividends per share will be paid under each plan over five years? (Do not round intermediate calculations and round your answers to 2 decimal places.)
b-1. Mr. Bright, the vice president of finance, suggests that stockholders often prefer a stable dividend policy to a highly variable one. He will assume that stockholders apply a lower discount rate to dividends that are stable. The discount rate to be used for Plan A is 8 percent; the discount rate for Plan B is 12 percent. Compute the present value of future dividends. (Do not round intermediate calculations and round your answers to 2 decimal places.)
b-2. Which plan will provide the higher present value for the future dividends?
Question
The stock of Pills Berry Company is currently selling at $95 per share. The firm pays a dividend of $3.00 per share.
a. What is the annual dividend yield? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
b. If the firm has a payout rate of 50 percent, what is the firm’s P/E ratio? (Do not round intermediate calculations and round your answer to 2 decimal places.)
Question
The shares of the Dyer Drilling Co. sell for $60. The firm has a P/E ratio of 20. Fifty percent of earnings is paid out in dividends.
What is the firm’s dividend yield? (Do not round your intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Question
The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for $7 per share.
The firm intends to first declare a 15 percent stock dividend and then pay a 20-cent cash dividend (which also causes a reduction of retained earnings).
Show the capital section of the balance sheet after the first transaction and then after the second transaction. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)
Question
Phillips Rock and Mud is trying to determine the maximum amount of cash dividends it can pay this year. Assume its balance sheet is as follows:
a-1. From a legal perspective, what is the maximum amount of dividends per share the firm could pay? (Do not round intermediate calculations and round your answer to 2 decimal places.)
a-2. Is this realistic?
b. In terms of cash availability, what is the maximum amount of dividends per share the firm could pay? (Do not round intermediate calculations and round your answer to 2 decimal places.)
c. Assume the firm earned an 12 percent return on stockholders’ equity last year. If the board wishes to pay out 70 percent of earnings in the form of dividends, how much will dividends per share be? (Do not round intermediate calculations and round your answer to 2 decimal places.)
Question
Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate.
D0 is currently $2.60, Ke is 8 percent, and g is 4 percent.
Under Plan A, D0 would be immediately increased to $3.00 and Ke and g will remain unchanged.
Under Plan B, D0 will remain at $2.60 but g will go up to 5 percent and Ke will remain unchanged.
a. Compute P0 (price of the stock today) under Plan A. Note D1 will be equal to D0 × (1 + g) or $3.00 (1.04). Ke will equal 8 percent, and g will equal 4 percent. (Round your intermediate calculations and final answer to 2 decimal places.)
b. Compute P0 (price of the stock today) under Plan B. Note D1 will be equal to D0 × (1 + g) or $2.60 (1.05). Ke will be equal to 8 percent, and g will be equal to 5 percent. (Round your intermediate calculations and final answer to 2 decimal places.)
c. Which plan will produce the higher value?
Question
Wilson Pharmaceuticals’ stock has done very well in the market during the last three years. It has risen from $45 to $70 per share. The firm’s current statement of stockholders’ equity is as follows:
a-1. How many shares would be outstanding after a two-for-one stock split? (Do not round intermediate calculations. Input your answer in millions (e.g., $1.23 million should be entered as "1.23").)
a-2. What would be its par value? (Do not round intermediate calculations and round your answer to 2 decimal places.)
b-1. How many shares would be outstanding after a three-for-one stock split? (Do not round intermediate calculations. Input your answer in millions (e.g., $1.23 million should be entered as "1.23").)
b-2 What would be its par value? (Do not round intermediate calculations and round your answer to 2 decimal places.)
c. Assume that Wilson earned $10 million. What would its earnings per share be before and after the two-for-one stock split? After the three-for-one stock split? (Do not round intermediate calculations and round your answers to 2 decimal places.)
d. What would be the price per share after the two-for-one stock split? After the three-for-one stock split? (Assume that the price-earnings ratio of 7.00 stays the same.) (Do not round intermediate calculations and round your answers to 2 decimal places.)
Question
Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend.
*The increase in capital in excess of par as a result of a stock dividend is equal to the new shares created times (Market price − Par value).
The company’s stock is selling for $10 per share. The company had total earnings of $2,400,000 during the year. With 2,400,000 shares outstanding, earnings per share were $1. The firm has a P/E ratio of 10.
a. What adjustments would have to be made to the capital accounts for a 10 percent stock dividend? Show the new capital accounts. (Do not round intermediate calculations. Input your answers in dollars, not millions (e.g. $1,230,000).)
b. What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains constant.) (Do not round intermediate calculations and round your answers to 2 decimal places.)
c. How many shares would an investor end up with if he or she originally had 100 shares? (Do not round intermediate calculations and round your answer to the nearest whole share.)
d. What is the investor's total investment worth before and after the stock dividend if the P/E ratio remains constant? (Do not round intermediate calculations and round your answers to the nearest whole dollar.)
Question
Health Systems Inc. is considering a 15 percent stock dividend. The capital accounts are as follows:
*The increase in capital in excess of par as a result of a stock dividend is equal to the shares created times (Market price – Par value).
The company’s stock is selling for $28 per share. The company had total earnings of $7,000,000 with 3,500,000 shares outstanding and earnings per share were $2.00. The firm has a P/E ratio of 14.
a. What adjustments would have to be made to the capital accounts for a 15 percent stock dividend? Show the new capital accounts. (Do not round intermediate calculations. Input your answers in dollars, not millions (e.g. $1,230,000).)
b. What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains constant.) (Do not round intermediate calculations and round your answers to 2 decimal places.)
c. How many shares would an investor have if he or she originally had 100? (Do not round intermediate calculations and round your answer to the nearest whole share.)
d. What is the investor’s total investment worth before and after the stock dividend if the P/E ratio remains constant? (Do not round intermediate calculations and round your answers to the nearest whole dollar.)
e. Assume Mr. Heart, the president of Health Systems, wishes to benefit stockholders by keeping the cash dividend at a previous level of $1.15 in spite of the fact that the stockholders now have 15 percent more shares. Because the cash dividend is not reduced, the stock price is assumed to remain at $28.
What is an investor’s total investment worth after the stock dividend if he/she had 100 shares before the stock dividend?
f. Under the scenario described in part e, is the investor better off?
g. As a final question, what is the dividend yield on this stock under the scenario described in part e? (Input your answer as a percent rounded to 2 decimal places.)
Question
Worst Buy Company has had a lot of complaints from customers of late, and its stock price is now only $4 per share. It is going to employ a one-for-six reverse stock split to increase the stock value. Assume Dean Smith owns 108 shares.
a. How many shares will he own after the reverse stock split? (Do not round intermediate calculations and round your answer to the nearest whole number.)
b. What is the anticipated price of the stock after the reverse stock split? (Do not round intermediate calculations and round your answer to 2 decimal places.)
c. Because investors often have a negative reaction to a revere stock split, assume the stock only goes up to 80 percent of the value computed in part b. What will the stock’s price be? (Do not round intermediate calculations and round your answer to 2 decimal places.)
d. How has the total value of Dean Smith’s holdings changed from before the reverse stock split to after the reverse stock split (based on the stock value computed in part c)? To get the total value before and after the split, multiply the shares held times the stock price. (Input the amount as a positive value. Do not round intermediate calculations and round your answer to 2 decimal places.)
Question
The Carlton Corporation has $3 million in earnings after taxes and 1 million shares outstanding. The stock trades at a P/E of 5. The firm has $2 million in excess cash.
a. Compute the current price of the stock. (Do not round intermediate calculations and round your answer to 2 decimal places.)
b. If the $2 million is used to pay dividends, how much will dividends per share be? (Do not round intermediate calculations and round your answer to 2 decimal places.)
c. If the $2 million is used to repurchase shares in the market at a price of $17 per share, how many shares will be acquired? (Do not round intermediate calculations and round your answer to the nearest whole share.)
d. What will the new earnings per share be? (Use the rounded number of shares computed in part c but do not round any other intermediate calculations. Round your answer to 2 decimal places.)
e-1. If the P/E ratio remains constant, what will the price of the securities be? (Use the rounded answer from part d and round your answer to the nearest whole dollar.)
e-2. By how much, in terms of dollars, did the repurchase increase the stock price? (Use the rounded whole dollar answer from part e-1. A negative value should be indicated with a minus sign. Round your answer to the nearest whole dollar.)
f. Has the stockholders' total wealth changed as a result of the stock repurchase as opposed to receiving the cash dividend?
Question
The Hastings Sugar Corporation has the following pattern of net income each year, and associated capital expenditure projects. The firm can earn a higher return on the projects than the stockholders could earn if the funds were paid out in the form of dividends.
The Hastings Corporation has 3 million shares outstanding (The following questions are separate from each other).
a. If the marginal principle of retained earnings is applied, how much in total cash dividends will be paid over the five years? (Enter your answer in millions.)
b. If the firm simply uses a payout ratio of 20 percent of net income, how much in total cash dividends will be paid? (Enter your answer in millions and round your answer to 1 decimal place.)
c. If the firm pays a 20 percent stock dividend in years 2 through 5, and also pays a cash dividend of $3.40 per share for each of the five years, how much in total dividends will be paid?
d. Assume the payout ratio in each year is to be 20 percent of net income and the firm will pay a 10 percent stock dividend in years 2 through 5. How much will dividends per share for each year be? (Assume cash dividend is paid after the stock dividend). (Round your answers to 2 decimal places.)
