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(solution) Becker Brothers is the managing underwriter for a


Becker Brothers is the managing underwriter for a 1.45-million-share issue by Jay?s Hamburger Heaven. Becker Brothers is ?handling? 12 percent of the issue. Its price is $28 per share and the price to the public is $29.00.
Becker also provides the market stabilization function. During the issuance, the market for the stock turned soft, and Becker is forced to purchase 50,000 shares in the open market at an average price of $28.50. They later sell the shares at an average value of $28.10.


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.)

2.

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 12 percent and the discount rate (Ke) is 15 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.)


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 $51.83 (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.)

3.

The Landers Corporation needs to raise $1.40 million of debt on a 20-year issue. If it places the bonds privately, the interest rate will be 14 percent. Thirty five thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 12 percent, and the underwriting spread will be 4 percent. There will be $110,000 in out-of-pocket costs. Assume interest on the debt is paid semiannually, and the debt will be outstanding for the full 20-year period, at which time it will be repaid. 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 $1.40 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.)

Private placement

Public issue

Net amount to Landers

Present value to future payment

Net present value

4.

The Presley Corporation is about to go public. It currently has aftertax earnings of $6,500,000, 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 $20 per share, with a 5 percent spread on the offering price. There will also be $300,000 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.)

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.)

5.

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.)

6.

Preston Corporation has a bond outstanding with an annual interest payment of $110, a market price of $1,260, and a maturity date in 5 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.)

  • Approximate yield to maturity 2. Exact yield to maturity

6.

A 10-year, $1,000 par value zero-coupon rate bond is to be issued to yield 8 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 7 percent, what would be the value of the zero-coupon rate bond? (Assume annual compo

c.

If immediately upon issue, interest rates increased to 10 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.)

8.

Assume a zero-coupon bond that sells for $386 will mature in 25 years at $2,100. 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.)

9.

Seventeen years ago, the Archer Corporation borrowed $7,350,000. Since then, cumulative inflation has been 95 percent (a compound rate of approximately 4 percent per year).

a.

When the firm repays the original $7,350,000 loan this year, what will be the effective purchasing power of the $7,350,000? (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 $7,350,000 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.)

10.

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.)

11.

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

           
The percentage gain is larger than the percentage loss because the investment is larger.

The percentage gain is larger than the percentage loss because the investment is smaller.

 


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