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 $1.64. The growth rate (g) is 8 percent and the discount rate (Ke) is 13 percent.
a. What should be the price of the stock to the public?
b. If there is a 7 percent total underwriting spread on the stock, how much will the issuing corporation receive?
c. If the issuing corporation requires a net price of $31.30 (proceeds to the corporation) and there is a 7 percent underwriting spread, what should be the price of the stock to the public? (Round to two places to the right of the decimal point.)
Assuming the issue price is $100.
The underwriting spread is 7% (given).
Net received by the corporation is $93, i.e., the difference between the issue price and underwriting spread.
Question: The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders’ claims are also shown.
Machinery and equipment
Building and plant
|Liabilities and stockholder’s claims|
First lien, secured by machinery and equipment
Senior unsecured debt
Total stockholder’s claims
Total liabilities and stockholder’s claims
e. List the remaining asset claims of unsatisfied secured debt holders and unsecured debt holders in a manner similar to that shown at the bottom portion of Table16A-3.
Question: The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:
For the year 20X1
Sales (all on credit)
Cost of goods sold
Selling and administrative expenses
Net income before taxes
As of December 31, 20X1
Total current assets
Net plant and equipment
Liabilities and stockholders’ equity
Total current liabilities
Common stock (1,800,000 shares at $1 par)
Capital in excess of par
Total stockholder’s equity
Total liabilities and stockholder’s equity
c. What return must the corporation earn on the net proceeds to equal the earnings per share before the offering? How does this compare with current return on the total assets on the balance sheet?
Walton and Company is the managing investment banker for a major new underwriting. The price of the stock to the investment banker is $23 per share. Other syndicate members may buy the stock for $24.25. The price to the selected dealers group is $24.80, with a price to brokers of $25.20. Finally, the price to the public is $29.50.
Question: 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 after-tax cost of debt) to analyze the refunding decision.
a. Calculate the present value of total outflows.
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