BUSI-320 Corporate Finance-2013 Fall-B (Moten)) homwork 7

Futures markets allow investors to manage risk.

Futures markets can be used to hedge against changing commodity
prices.

Interest rate futures can be used to hedge against the risk of rising
interest rates.

All of the statements above are true.

All of the following are recognized as an important influences in the
development of the banking crisis of 2008 and the resulting credit crisis
EXCEPT:

Consumers, especially homeowners, took on too much debt.

Real estate prices collapsed.

Too many subprime loans were repackaged and sold as securities.

The IMF bailed out Freddie Mac and Fannie Mae.

the collapse of Asian currencies in Thailand, Indonesia, Malaysia and
Korea.

Russia’s default on its sovereign debt.

Japan’s seven years of economic stagnation.

a and b are true.

Britain, France, Germany, Spain, Italy and 6 other European countries.

The establishment of a new European Central Bank to coordinate
monetary policy for the Euro-zone countries.

A new currency called the Euro, which will be put into circulation in
all EMU countries no later than 2009.

All of these.

During
the next ten years, the major threat to the dominance of the U.S. money and
capital markets will come from

The Euro-zone countries comprising the European Monetary Union and a
single currency.

The huge Chinese economy and its billion plus people.

Russia’s difficulty in transforming its economy into a capitalistic
one.

Japan’s prolonged recession and banking crisis.

preferred stocks require a dividend.

bond interest rates change with the economy while stock dividends
remain constant.

the after-tax cost of debt is less than the cost of preferred stock.

none of these.

accept more risk.

try to lock in long-term financing at low cost.

rely more on internal sources of funds rather than external sources.

balance the company’s debt structure with more short-term debt and
less long-term debt.

households.

businesses.

government.

financial institutions.

the markets can absorb large dollar amounts of stock without
destabilizing the price.

security prices follow the leading indicators such as the DJIA very
closely.

prices adjust rapidly to new information.

there is a continuous market where each successive trade is made at a
price close to the previous trade

one of these

require that all securities sold in more than one state be registered
with the SEC.

original issues of securities.

a central market system.

regulation of organized exchanges.

protecting customers of bankrupt securities firms.

American
Health Systems currently has 5,500,000 shares of stock outstanding and will
report earnings of $16 million in the current year. The company is
considering the issuance of 1,800,000 additional shares that will net $40 per
share to the corporation.

Kevin’s
Bacon Company Inc. has earnings of $8 million with 2,100,000 shares
outstanding before a public distribution. Eight hundred thousand shares will
be included in the sale, of which 500,000 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 for the offering will be $24.50 and the corporate proceeds are
expected to produce $1.6 million in corporate earnings.

(a)

What
were the corporation’s earnings per share before the offering? (Enter your answer in dollars not in millions. Round
your answer to 2 decimal places. Omit the “$” sign in your
response.)

Earnings
per share

$ 

(b)

What
are the corporation’s earnings per share expected to be after the offering? (Enter your answer in dollars not in millions. Round
your answer to 2 decimal places. Omit the “$” sign in your
response.)

Earnings
per share

$  

Becker
Brothers is the managing underwriter for a 1.5-million-share issue by Jay’s
Hamburger Heaven. Becker Brothers is “handling” 8 percent of the issue. Its
price is $20 per share and the price to the public is $23.50.
Becker also provides the market stabilization
function. During the issuance, the market for the stock turns soft, and
Becker is forced to purchase 50,000 shares in the open market at an average
price of $22.00. They later sell the shares at an average value of $21.00.

Compute
Becker Brothers’ overall gain or loss from managing the issue. (Input the amount as positive value. Enter your answer
in dollars not in millions. Omit the “$” sign in your
response.)

Net
gain

Winston
Sporting Goods is considering a public offering of common stock. Its
investment banker has informed the company that the retail price will be
$19.00 per share for 590,000 shares. The company will receive $17.40 per
share and will incur $160,000 in registration, accounting, and printing fees.

(a-1)

What is
the spread on this issue in percentage terms? (Round your intermediate calculations and final answer to 2 decimal
places. Omit the ” % ” sign in your response.)

Spread

%

(a-2)

What
are the total expenses of the issue as a percentage of total value (at
retail)? (Round your intermediate
calculations and final answer to 2 decimal places. Omit the ” % ”
sign in your response.)

Expenditure
percentage

  %

(b)

If the
firm wanted to net $14.63 million from this issue, how many shares must be
sold?

Shares

Slightly
above average

Average

Quality
of management

High

Average

Assume,
in assessing the in

%

=

.

=

$65

=

5.65%

$1150

An
investor must choose between two bonds:

Bond A
pays $70 annual interest and has a market value of $845. It has 5 years to
maturity.

B

Bond B

(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 11.14
percent. What is the approximate yield to maturity on Bond B? (Round your answer to 2 decimal places. Omit the
“%” sign in your response.)

Approximate
yield to maturity

%

(d)

Has
your answer changed between parts b and c of
this question in terms of which bond to select?

No

Match
the security provisions with the yield to maturity.

(1)

(2)

Security
provision

Yield to maturity

(a)
Debenture

9.20 %

(b)
Secured debt

11.50 %

(c)
Subordinate debenture

10.20 %

(a)
Debenture

(b)
Secured debt

(c)
Subordinate debenture

PV
of inflows

$

1,266,164

PV
of outflows

1,621,116

Net
present value

$

-354,952

Do not
refund the old issue (particularly if it is perceived that interest rates
will go down even more).

The
Robinson Corporation has $46 million of bonds outstanding that were issued at
a coupon rate of 8 3/4 percent seven years ago. Interest rates have fallen to
7 3/4 percent. Mr. Brooks, the vice-president of finance, does not expect
rates to fall any further. The bonds have 16 years left to maturity, and Mr.
Brooks would like to refund the bonds with a new issue of equal amount also
having 16 years to maturity. The Robinson Corporation has a tax rate of 30
percent. The underwriting cost on the old issue was 2.7 percent of the total
bond value. The underwriting cost on the new issue will be 2 percent of the
total bond value. The original bond indenture contained a five-year
protection against a call, with a 8.5 percent call premium starting in the
sixth year and scheduled to decline by one-half percent each year thereafter.
(Consider the bond to be 7 years old for purposes of computing the premium).
Assume the discount rate is equal to the aftertax cost of new debt rounded to
the nearest whole number.

What
would be the aftertax cost of the call premium at the end of year 11 (in
dollar value)? (Omit the “$” sign
in your response.)

Aftertax
cost of the call premium

$

The
Robinson Corporation Call premium (aftertax cost)

7 years
of 1/2% deductions (5^th through 11^th year) =
2 1/2%

8 1/2

%

Call
premium

?2 1/2

%

6

%

Call
premium at the end of the 11^th year

$
46,000,000 × 6% = $ 2,760,000

$
2,760,000 (1 – .30) = $ 1,932,000

The
Deluxe Corporation has just signed a 192-month lease on an asset with a
21-year life. The minimum lease payments are $1,500 per month ($18,000 per
year) and are to be discounted back to the present at a 11 percent annual
discount rate. The estimated fair value of the property is $175,000.
Use Appendix D.

(a)

Calculate
the lease period as a percentage to the estimated life of the leased
property. (Round your answer to the nearest
whole percent. Omit the “%” sign in your response.)

Lease
period

  %

(b)

Calculate
the present value of lease payments as a percentage to the fair value of the
property. (Round “PV Factor” to 3
decimal places. Round your intermediate and final answer to 1 decimal
place. Omit the “%” sign in your response.)

Present
value of lease payments

  %

(c)

Should
the lease be recorded as a capital lease or an operating lease?

Capital
lease

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.

In $ millions

In $ millions

Current
assets

$

65

Current
liabilities

$

20

Fixed
assets

65

Long-term
liabilities

35

Total
liabilities

$

55

Stockholders’
equity

75

Total
assets

$

130

Total
liabilities and
stockholders’ equity

$

130

The
footnotes stated that the company had $23 million in annual capital lease
obligations for the next 10 years.

(a)

Discount
these annual lease obligations back to the present at a 12 percent discount
rate. (Enter your answers in millions rounded
to nearest whole number. Round “PV Factor” to 3 decimal
places. Omit the “$” sign in your response.)

Annual
lease obligations

$ million

(b)

Construct
a revised balance sheet that includes lease obligations. (Enter your answers in millions rounded to nearest whole
number. Round “PV Factor” to 3 decimal places. Omit the
“$” sign in your response.)

Balance Sheet (in millions)

Current
assets

$5

Current
liabilities

$  

Fixed
assets

Long-term
liabilities

Leased
property
under capital lease

Obligations
under
capital lease

Total
liabilities

Stockholders’
equity

Total
assets

$  

Total
liabilities and
Stockholders’ equity

$  

(c)

Compute
total debt to total assets on the original and revised balance sheets. (Round your answer to 1 decimal place. Omit the
“%” sign in your response.)

Original

  %

Revised

  %

(d)

Compute
total debt to equity on the original and revised balance sheets. (Round your answer to 1 decimal place. Omit the
“%” sign in your response.)

Original

7  %

Revised

%

The
Hardaway Corporation plans to lease a $870,000 asset to the O’Neil
Corporation. The lease will be for 10 years. Use Appendix D.

(a)

If the
Hardaway Corporation desires a 9 percent return on its investment, how much
should the lease payments be? (Round “PV
Factor” to 3 decimal places. Round your answer to the nearest dollar
amount. Omit the “$” sign in your response.)

Lease
payment

$6

(b)

The
Hardaway Corporation is able to take a 10 percent deduction from the purchase
price of $870,000 and will pass the benefits along to the O’Neil Corporation
in the form of lower lease payments, (related to the Hardaway Corporation in
the form of lower initial net cost), how much should the revised lease
payments be? The Hardaway Corporation desires a 9 percent return on the
10-year lease. (Round “PV Factor”
to 3 decimal places. Round your answer to the nearest dollar amount. Omit the
“$” sign in your response.)

Revised
lease payment

$ 122,001