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.
d. Should the old issue be refunded with new debt?
The company should refund the old issue with new bonds as the bond interest rates have declined from 10% to 8.5%.
The process of issuing new bonds for the purpose of repaying the matured bonds is called refunding. The bonds issued for raising funds for retiring old bonds are called refunded bonds.
The company should refund the old bonds with new debt. The interest rates of bonds have declined from 10% to 8.5% and the company will be able to generate interest savings and increase its income by refunding the bonds.
Kevin’s Bacon Company Inc. has earnings of $9 million with 2,100,000 shares outstanding before a public distribution. Seven hundred thousand shares will be included in the sale, of which 400,000 are new corporate shares, and 300,000 are shares currently owned by Ann Fry, the founder and CEO. The 300,000 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 $16.50, and the corporate proceeds are expected to produce $1.8 million in corporate earnings.
a. What were the corporation’s earnings per share before the offering?
b. What are the corporation’s earnings per share expected to be after the offering?
Becker Brothers is the managing underwriter for a 1.45-millon-share issue by Jay’s Hamburger Heaven. Becker Brothers is “handling” 10 percent of the issue. Its price is $27 per share, and the price to the public is $28.95.
Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 50,000 shares in the open market at an average price of $27.50. It later sells the shares at an average value of $27.20.
Compute Becker Brother’s overall gain or loss from managing the issue.
The Presley Corporation is about to go public. It currently has after-tax earnings of $7,200,000, and 2,100,000 shares are owned by the present stockholders (the 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.
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.
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
e. Assuming an underwriting spread of 5 percent and out-of-pocket costs of $300,000, what will net proceeds to the corporation be?
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