Project #121464 - Finance Problems

Chapter 15;  #3, #4, #8, #19.

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.

 

 

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

 

 

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

501

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, #7, #17.

4.   An investor must choose between two bonds: Bond A pays $72 annual interest and has a market value of $925. It has 10 years to maturity. Bond B pays $62 annual interest and has a market value of $910. It has two years to maturity. Assume the par value of the bonds is $1,000.

a. Compute the current yield on both bonds.

b. Which bond should she select based on your answer to part a?

c. A drawback of current yield is that it does not consider the total life of the bond. For example, the yield to maturity on Bond A is 8.33 percent. What is the yield to maturity on Bond B?

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

 

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?

Subject Mathematics
Due By (Pacific Time) 04/17/2016 12:00 am
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