Corporate debt has been expanding very dramatically in the last three decades. What has been the impact on interest coverage, particularly since 1977? (LO16-1)
In 1977, the U.S. corporations had interest coverage eight times, decreasing when the financial crisis ended.
Corporate debt is one of the financial instruments issued by a corporation to raise capital. A person investing in corporate debts is entitled to receive fixed interest payments.
The U.S. manufacturing corporations covered its interest payments at a rate of eight times by operating earnings in 1977.
At the end of the financial crisis in 2007-08, the times' interest earned graph moved down to 2.4 times.
Jordan Broadcasting Company is going public at $50 net per share to the company. There also are founding stockholders that are selling part of their shares at the same price. Prior to the offering, the firm had $26 million in earnings divided over 11 million shares. The public offering will be for 5 million shares; 3 million will be new corporate shares and 2 million will be shares currently owned by the founding stockholders.
a. What is the immediate dilution based on the new corporate shares that are being offered?
b. If the stock has a P/E of 30 immediately after the offering, what will the stock price be?
c.hould the founding stockholders be pleased with the $50 they received for their shares?
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:
In $ millions
In $ millions
Total stockholder’s equity and liabilities
The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.
e. In an efficient capital market environment, should the consequences of SFAS No. 13, as viewed in the answers to parts c and d, change stock prices and credit ratings?
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.
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