8.

value: 1.00 points

American Health Systems currently has 6,400,000 shares of stock outstanding and will report earnings of $13 million in the current year. The company is considering the issuance of 12,500,000 aIDitional shares that will net $60 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.)

Dilution

$ per share

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 years results. Calculate earnings per share. (Do not round intermediate calculations and round your answer to 2 decimal places.)

Earnings per share

$

b-2.

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

Yes

No

9.

value: 1.00 points

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

Size of Offer

Public Price

Net to Corporation

a.

$

2.4

million

$

46

$

42.60

b.

7.0

million

46

43.20

c.

28.0

million

46

43.50

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.)

Size of Offer

Underwriting Spread

a.

$2.4 million

%

b.

$7.0 million

%

c.

$28.0 million

%

0.

value: 2.00 points

The Wrigley Corporation needs to raise $35 million. The investment banking firm of Tinkers, Evers, & Chance will handle the transaction.

a.

If stock is utilized, 2,200,000 shares will be sold to the public at $17.20 per share. The corporation will receive a net price of $16.00 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.)

Underwriting spread per share

%

b.

If bonds are utilized, slightly over 35,200 bonds will be sold to the public at $1,006 per bond. The corporation will receive a net price of $993 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.)

Underwriting spread per bond

%

c-1.

Which alternative has the larger percentage of spread?

Stock

Bond

c-2.

Is this the normal relationship between the two types of issues?

Yes

No

11.

value: 2.00 points

Kevins 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.

a.

What were the corporations earnings per share before the offering? (Do not round intermediate calculations and round your answer to 2 decimal places.)

Earnings per share

$

b.

What are the corporations earnings per share expected to be after the offering? (Do not round intermediate calculations and round your answer to 2 decimal places.)

Earnings per share

$

13.

value: 2.00 points

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 7 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.)

Price of the stock

$

b.

If there is a 6 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.)

Net price to the corporation

$

c.

If the issuing corporation requires a net price of $48.50 (proceeds to the corporation) and there is a 6 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.)

Necessary public price

$

14.

value: 3.00 points

The Landers Corporation needs to raise $1.20 million of debt on a 5-year issue. If it places the bonds privately, the interest rate will be 8 percent. Twenty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 8 percent, and the underwriting spread will be 5 percent. There will be $100,000 in out-of-pocket costs. Assume interest on the debt is paid semiannually, and the debt will be outstanding for the full 5-year period, at which time it will be repaid. Use Appendix B and Appendix Dfor 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 availableinflowto the present value of future payments of interest and principal to determine net present value. Assume the stated discount rate is 12 percent annually. Use 6.00 percent semiannually throughout the analysis. (Disregard taxes.)(Assume the $1.20 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.)

Private Placement

Public Issue

Net amount to Landers

$

$

Present value of future payments

Net present value

$

$

b.

Which plan offers the higher net present value?

Private placement

Public issue

Hint #1

15.

value: 2.00 points

The Presley Corporation is about to go public. It currently has aftertax earnings of $6,900,000, and 3,200,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 500,000 new shares. The new shares will be priced to the public at $15 per share, with a 6 percent spread on the offering price. There will also be $270,000 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.)

Net proceeds

$

b.

Compute the earnings per share immediately before the stock issue. (Do not round intermediate calculations and round your answer to 2 decimal places.)

Earnings per share

$

c.

Compute the earnings per share immediately after the stock issue. (Do not round intermediate calculations and round your answer to 2 decimal places.)

Earnings per share

$

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.)

Rate of return

%

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.)

Rate of return

%

16.

value: 2.00 points

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.

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).)

Initial cost

$ million

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 2.50 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).)

Total value to the company

$ million

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.)

Percentage return

%

17.

value: 2.00 points

Preston Corporation has a bond outstanding with an annual interest payment of $80, a market price of $1,270, and a maturity date in 9 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.)

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