Take the following list of securities and arrange them in order of their priority of claims: (LO16-1)
Preferred stock Senior debenture
Subordinated debenture Senior secured debt
Common stock Junior secured debt
According to the priority of claims, secured debts are settled first, and then other claims are paid.
Funds refer to the pool of money collected by the corporations to function their business operations. The primary sources of funds collection are the issuance of stocks and bonds.
The order of settling the claims according to the priority should be:
According to the settlement of claims order, those categories should be paid first with which assets are pledged.
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
g. List the remaining claims (unsatisfied secured and unsecured) and make an initial allocation and final allocation similar to that shown in Table 16A-4. Subordinated debenture holders may keep the balance after full payment is made to senior debt holders.
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.
Midland Corporation has a net income of $19 million and 4 million shares outstanding. Its common stock is currently selling for $48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of $21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for $44 per share with a spread of 4 percent.
e. Are the shareholders better off because of the sale of stock and the resultant investment? What other financing strategy could the company have tried to increase earnings per share?
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