Finance

Finance
Sixth week’s assignment involves new issues of common shares, underwriting spread, bond yield, zero-coupon bonds, bond analysis and lease obligations. Please complete the following: Chapter 15; #3, #4, #8, #19. Chapter 16; #4, #7, #17. Chapter 17; #18 Chapter 18; #1, #14, #21. Chapter 20; #6. There should be a total of two documents please upload Chapter 15, 16, & 17 as one document and Chapter 17,18 &20 as one doucment. You will be using your e textbook: https://bookshelf.vitalsource.com

Chapter 15

3. American Health Systems currently has 6,400,000 shares of stock outstanding and will report earnings of $10 million in the current year. The company is considering the issuance of 1,700,000 additional shares that will net $30 per share to the corporation.

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

b. Assume that American Health Systems can earn 9 percent on the proceeds of the stock issue in time to include them in the current year’s results. Calculate earnings per share. Should the new issue be undertaken based on earnings per share?

4. Using the information in Problem 3, assume that American Health Systems’ 1,700,000 additional shares can only be issued at $18 per share.

a. Assume that American Health Systems can earn 6 percent on the proceeds. Calculate earnings per share.

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

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

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Size of Offer Public Price Net to Corporation

a. 1.1 million $30 $27.50

b. 7.0 million $30 28.44

c. 28.0 million $30 29.15

What is the percentage underwriting spread for each size offer?

19. The Presley Corporation is about to go public. It currently has aftertax earnings of $7,200,000, and 2,100,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 800,000 new shares. The new shares will be priced to the public at $25 per share, with a 5 percent spread on the offering price. There will also be $260,000 in out-of-pocket costs to the corporation.

a. Compute the net proceeds to the Presley Corporation.

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

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

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.

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.

Chapter 16

4. Underwriting cost on old issue

Original amount $450,000

Annual write-off $450,000/15 = 30,000

Amount written off over initial 5 years at $30,000 per year $150,000

Unamortized old underwriting cost $300,000

PV of future write-off of $30,000 per year:

n = 10 (years remaining i = 5%)

PV = 30,000 × 7.722 = $231,660

Take the difference between the unamortized old underwriting costs of $300,000 and the PV of the future write-off of $231,600.

Immediate write-off of unamortized old underwriting costs $300,000

– PV of future write-off 231,660

Net gain from immediate write-off $ 68,340

Multiply this figure by the tax rate to get the net tax benefit $ 68,340

of the immediate write-off 0.30

$ 20,502

Summarize the inflows and outflows to get the net present value. To help complete question check out image on page 52 in your etextbook. Due to the positive net present value, the old issue should be refunded.

7. Cox Media Corporation pays an 11 percent coupon rate on debentures that are due in 10 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,110. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds.

a. Find the market value of the bonds using semiannual analysis.

b. Do you think the bonds will sell for the price you arrived at in part a? Why?

17. The Bowman Corporation has a $18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new $18,000,000 issue is $530,000, and the underwriting cost on the old issue was $380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded aftertax cost of debt) to analyze the refunding decision.

a. Calculate the present value of total outflows.

b. Calculate the present value of total inflows.

c. Calculate the net present value.

d. Should the old issue be refunded with new debt?

Chapter 17

18. National Health Corporation (NHC) has a cumulative preferred stock issue outstanding, which has a stated annual dividend of $8 per share. The company has been losing money and has not paid preferred dividends for the last five years. There are 350,000 shares of preferred stock outstanding and 650,000 shares of common stock.

a. How much is the company behind in preferred dividends?

b. If NHC earns $13,500,000 in the coming year after taxes but before dividends, and this is all paid out to the preferred stockholders, how much will the company be in arrears (behind in payments)? Keep in mind that the coming year would represent the sixth year.

c. How much, if any, would be available in common stock dividends in the coming year if $13,500,000 is earned as explained in part b?

Chapter 18

1. Moon and Sons Inc. earned $120 million last year and retained $72 million. What is the payout ratio?

14. 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:

Assets

Cash $ 386,000

Accounts receivable 836,000

Fixed assets 1,048,000

Total assets $2,270,000

Liabilities and Stockholders’ Equity

Accounts payable $ 459,000

Long term payable 371,000

Common stock (295,000 shares at $1 par) 295,000

Retained earnings 1,145,000

Total liabilities and stockholders’ equity $2,270,000

a. From a legal perspective, what is the maximum amount of dividends per share the firm could pay?

b. In terms of cash availability, what is the maximum amount of dividends per share the firm could pay?

c. Assume the firm earned an 18 percent return on stockholders’ equity last year. If the board wishes to pay out 50 percent of earnings in the form of dividends, how much will dividends per share be? (Round to two places to the right of the decimal point.)

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21. The Carlton Corporation has $5 million in earnings after taxes and 2 million shares outstanding. The stock trades at a P/E of 20. The firm has $4 million in excess cash.

a. Compute the current price of the stock.

b. If the $4 million is used to pay dividends, how much will dividends per share be?

c. If the $4 million is used to repurchase shares in the market at a price of $54 per share, how many shares will be acquired? (Round to the nearest share.)

d. What will the new earnings per share be? (Round to two places to the right of the decimal.)

e. If the P/E ratio remains constant, what will the price of the securities be? By how much, in terms of dollars, did the repurchase increase the stock price?

f. Has the stockholders’ total wealth changed as a result of the stock repurchase as opposed to receiving the cash dividend?

g. What are some reasons a corporation may wish to repurchase its own shares in the market?

Chapter 20

6. Assume the following financial data for the Noble Corporation and Barnes Enterprises:

Noble Corporation Barnes Enterprises

Total earnings $1,820,000 $5,620,000

Number of shares of stock outstanding 650,000 2,810,000

Earnings per share $2.80 $2.00

Price-earnings ratio (P/E) 20× 28×

Market price per share $56 $56

a. If all the shares of the Noble Corporation are exchanged for those of Barnes Enterprises on a share-for-share basis, what will postmerger earnings per share be for Barnes Enterprises? Use an approach similar to that in Table 20-3.

b. Explain why the earnings per share of Barnes Enterprises changed.

c. Can we necessarily assume that Barnes Enterprises is better off after the merger?

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