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Finance Week 7 Homework Fall 2014

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Question;1.12/1/14, 10:38 PMaward:1.00 pointWhich of the following is not a money market instrument?Treasury billsCommercial paperNegotiable certificates of depositTreasury bondsMultiple Choice2.Difficulty: BasicLearning Objective: 14-01 Thecapital markets, both domestic andforeign, are made up of securitiesthat have a life of one year or longer(often much longer).award:1.00 pointDuring the next several years, the major threat to the dominance of the U.S. money and capital markets is expected tocome fromRussia's difficulty in transforming its economy into a capitalistic one.Japan's prolonged recession and banking crisis.the Eurozone countries comprising the European Monetary Union and a single currency.the huge Chinese economy and its billion-plus people.Multiple Choice3.Difficulty: IntermediateLearning Objective: 14-02 Theprimary participants raising funds indomestic capital markets are theU.S. Treasury, other agencies of thefederal, state, and localgovernments, and corporations.award:1.00 pointFederally sponsored credit agencies include all but which of the following?Securities Investor Protection Corporation (SIPC)Federal Home Loan Banks (FHLB)Student Loan Marketing Association (Sallie Mae)Federal National Mortgage Association (Fannie Mae)Learning Objective: 14-02 Thehttp://ezto.mheducation.com/hm.tpxPage 1 of 15Assignment Print View12/1/14, 10:38 PMMultiple Choice4.Difficulty: Intermediateprimary participants raising funds indomestic capital markets are theU.S. Treasury, other agencies of thefederal, state, and localgovernments, and corporations.award:1.00 pointWhich of the following is an internal source of funds?Cash flow from depreciation (tax shield)Net lossRepurchase of debt securitiesBank loanMultiple Choice5.Difficulty: BasicLearning Objective: 14-01 Thecapital markets, both domestic andforeign, are made up of securitiesthat have a life of one year or longer(often much longer).award:1.00 pointWhich of the following is not an example of indirect investment by a household?Investment in a mutual fund's sharesInvestment in an original offering of corporate securitiesInvestment in life insuranceA savings deposit in a commercial bankMultiple Choice6.Difficulty: BasicLearning Objective: 14-03 TheUnited States is a three-sectoreconomy in which households,corporations, and governmentalunits allocate funds amongthemselves.award:1.00 pointSecurity markets provide liquidityby allowing corporations to raise funds by selling new issues.by creating a market in which owners may easily turn an investment into cash through its sale.by allowing corporations to raise funds by selling new issues and by creating a market in which ownersmay easily turn an investment into cash through its sale.None of these options are correct.http://ezto.mheducation.com/hm.tpxPage 2 of 15Assignment Print View12/1/14, 10:38 PMMultiple Choice7.Difficulty: BasicLearning Objective: 14-04 Securitiesmarkets consist of physical andelectronic markets.award:1.00 pointOf the following efficient market hypotheses, which one has research generally indicated is not correct?WeakSemi-strongStrongTwo of the optionsMultiple Choice8.Difficulty: BasicLearning Objective: 14-05 Securitymarkets are considered to beefficient when prices adjust rapidlyto new information.award:1.00 pointAmerican Health Systems currently has 5,800,000 shares of stock outstanding and will report earnings of$14 million in the current year. The company is considering the issuance of 1,400,000 additional shares thatwill net $20 per share to the corporation.a. What is the immediate dilution potential for this new stock issue? (Do not round intermediatecalculations and round your answer to 2 decimal places.)Dilution$per shareb-1. Assume that American Health Systems can earn 14 percent on the proceeds of the stock issue in timeto include them in the current years results. Calculate earnings per share. (Do not roundintermediate calculations and round your answer to 2 decimal places.)Earnings per share$b-2. Should the new issue be undertaken based on earnings per share?YesNoView Hint #1Worksheethttp://ezto.mheducation.com/hm.tpxDifficulty: BasicLearning Objective: 15-03Distribution of new securities mayinvolve dilution in earnings pershare.Page 3 of 15Assignment Print View9.12/1/14, 10:38 PMaward:1.00 pointAssume Sybase Software is thinking about three different size offerings for issuance of additional shares.a.b.c.Size of Offer$ 1.6 million8.0 million34.0 millionPublic Price$ 414141Net to Corporation$ 37.5038.2839.75What 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 Offera. $1.6 millionb. $8.0 millionc. $34.0 millionUnderwriting Spread%%%View Hint #1Worksheet10.Learning Objective: 15-02Investment bankers, rather thancorporations, normally take the riskof successfully distributing corporatesecurities and for this there arecosts involved.Difficulty: Basicaward:2.00 pointsThe Wrigley Corporation needs to raise $26 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 $13.25 per share. The corporation willreceive a net price of $12 per share. What is the percentage underwriting spread per share? (Do notround intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)Underwriting spread per share%b. If bonds are utilized, slightly over 26,400 bonds will be sold to the public at $1,008 per bond. Thecorporation will receive a net price of $995 per bond. What is the percentage of underwriting spreadper 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?StockBondhttp://ezto.mheducation.com/hm.tpxPage 4 of 15Assignment Print View12/1/14, 10:38 PMc-2. Is this the normal relationship between the two types of issues?YesNoView Hint #1Worksheet11.Difficulty: BasicLearning Objective: 15-02Investment bankers, rather thancorporations, normally take the riskof successfully distributing corporatesecurities and for this there arecosts involved.award:2.00 pointsKevins Bacon Company Inc. has earnings of $8 million with 2,600,000 shares outstanding before a publicdistribution. Five hundred thousand shares will be included in the sale, of which 300,000 are new corporateshares, and 200,000 are shares currently owned by Ann Fry, the founder and CEO. The 200,000 sharesthat 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 $24.50 and the corporate proceeds are expected to produce $1.9million in corporate earnings.a. What were the corporations earnings per share before the offering? (Do not round intermediatecalculations and round your answer to 2 decimal places.)Earnings per share$b. What are the corporations earnings per share expected to be after the offering? (Do not roundintermediate calculations and round your answer to 2 decimal places.)Earnings per share$View Hint #1Worksheet12.Difficulty: BasicLearning Objective: 15-02Investment bankers, rather thancorporations, normally take the riskof successfully distributing corporatesecurities and for this there arecosts involved.award:2.00 pointsBecker Brothers is the managing underwriter for a 1.20-million-share issue by Jays Hamburger Heaven.Becker Brothers is handling 10 percent of the issue. Its price is $22 per share and the price to the public is$23.75.Becker also provides the market stabilization function. During the issuance, the market for the stockhttp://ezto.mheducation.com/hm.tpxPage 5 of 15Assignment Print View12/1/14, 10:38 PMturned soft, and Becker is forced to purchase 60,000 shares in the open market at an average price of$22.50. They later sell the shares at an average value of $22.25.Compute Becker Brothers overall gain or loss from managing the issue. (Do not round intermediatecalculations and round your answer to the nearest whole dollar.)(Click to select)$View Hint #1Worksheet13.Difficulty: BasicLearning Objective: 15-02Investment bankers, rather thancorporations, normally take the riskof successfully distributing corporatesecurities and for this there arecosts involved.award:2.00 pointsThe investment banking firm of Einstein & Co. will use a dividend valuation model to appraise the shares ofthe Modern Physics Corporation. Dividends (D1) at the end of the current year will be $1.60. The growthrate (g) is 12 percent and the discount rate (Ke) is 15 percent.a. What should be the price of the stock to the public? (Do not round intermediate calculations andround your answer to 2 decimal places.)Price of the stock$b. If there is a 5 percent total underwriting spread on the stock, how much will the issuing corporationreceive? (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 $51.83 (proceeds to the corporation) and there is a 5percent underwriting spread, what should be the price of the stock to the public? (Do not roundintermediate calculations and round your answer to 2 decimal places.)Necessary public price$View Hint #1Worksheethttp://ezto.mheducation.com/hm.tpxDifficulty: IntermediateLearning Objective: 15-01Investment bankers areintermediaries between corporationsin need of funds and the investingpublic. They also provide importantadvice.Page 6 of 15Assignment Print View14.12/1/14, 10:38 PMaward:3.00 pointsThe Landers Corporation needs to raise $2.10 million of debt on a 20-year issue. If it places the bondsprivately, the interest rate will be 12 percent. Thirty five thousand dollars in out-of-pocket costs will beincurred. For a public issue, the interest rate will be 10 percent, and the underwriting spread will be 5percent. There will be $90,000 in out-of-pocket costs. Assume interest on the debt is paid semiannually, andthe debt will be outstanding for the full 20-year period, at which time it will be repaid. Use Appendix B andAppendix D for an approximate answer but calculate your final answer using the formula and financialcalculator methods.a. For each plan, compare the net amount of funds initially availableinflowto the present value of futurepayments of interest and principal to determine net present value. Assume the stated discount rate is 14percent annually. Use 7.00 percent semiannually throughout the analysis. (Disregard taxes.) (Assumethe $2.10 million needed includes the underwriting costs. Input your present value of futurepayments answers as negative values. Do not round intermediate calculations and round youranswers to 2 decimal places.)Private Placement$Net amount to LandersPresent value of future paymentsNet present value$Public Issue$$b. Which plan offers the higher net present value?Public issuePrivate placementView Hint #1Worksheet15.Difficulty: IntermediateLearning Objective: 15-01Investment bankers areintermediaries between corporationsin need of funds and the investingpublic. They also provide importantadvice.award:2.00 pointsThe Presley Corporation is about to go public. It currently has aftertax earnings of $7,600,000, and2,100,000 shares are owned by the present stockholders (the Presley family). The new public issue willrepresent 600,000 new shares. The new shares will be priced to the public at $20 per share, with a 6percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.a. Compute the net proceeds to the Presley Corporation. (Do not round intermediate calculations andround your answer to the nearest whole dollar.)Net proceeds$b. Compute the earnings per share immediately before the stock issue. (Do not round intermediatehttp://ezto.mheducation.com/hm.tpxPage 7 of 15Assignment Print View12/1/14, 10:38 PMcalculations 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 intermediatecalculations 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 bea dilution in earnings per share during the year of going public. (Do not round intermediatecalculations. 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 5percent increase in earnings per share during the year of going public. (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimal places.)Rate of return%View Hint #1Worksheet16.Difficulty: ChallengeLearning Objective: 15-03Distribution of new securities mayinvolve dilution in earnings pershare.award:2.00 pointsThe management of Mitchell Labs decided to go private in 2002 by buying all 2.90 million of its outstandingshares at $24.20 per share. By 2006, management had restructured the company by selling off thepetroleum research division for $10.50 million, the fiber technology division for $9.20 million, and thesynthetic products division for $19 million. Because these divisions had been only marginally profitable,Mitchell Labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusivelyon contract research and will generate earnings per share of $1.30 this year. Investment bankers havecontacted the firm and indicated that if it reentered the public market, the 2.90 million shares it purchased togo 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$millionb. 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 2.90 million shares (based on current earnings and an anticipated P/E of14)? (Do not round intermediate calculations. Round your answer to 2 decimal places. Enter youranswer in millions, not dollars (e.g., $1,230,000 should be entered as "1.23").)http://ezto.mheducation.com/hm.tpxPage 8 of 15Assignment Print View12/1/14, 10:38 PMTotal value to the company$millionc. What is the percentage return to the management of Mitchell Labs from the restructuring? Use answersfrom parts a and b to determine this value. (Do not round intermediate calculations. Enter youranswer as a percent rounded to 2 decimal places.)Percentage return%View Hint #1Worksheet17.Learning Objective: 15-05Leveraged buyouts rely heavily ondebt in the restructuring of acorporation.Difficulty: Challengeaward:2.00 pointsPreston Corporation has a bond outstanding with an annual interest payment of $100, a market price of$1,270, and a maturity date in 6 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 anduse the calculator method to compute the exact yield to maturity. Do not round intermediatecalculations. Input your answers as a percent rounded to 2 decimal places.)a.Coupon rate%b. Current yieldc-1. Approximate yield to maturityc-2. Exact yield to maturity%%%View Hint #1Worksheet18.Difficulty: BasicLearning Objective: 16-02 Bondyield are important to bond analysisand are influenced by how bondsare rated by major bond ratingagencies.award:2.00 pointsA 20-year, $1,000 par value zero-coupon rate bond is to be issued to yield 9 percent. Use Appendix B for anapproximate answer but calculate your final answer using the formula and financial calculator methods.a. What should be the initial price of the bond? (Assume annual compounding. Do not roundintermediate calculations and round your answer to 2 decimal places.)http://ezto.mheducation.com/hm.tpxPage 9 of 15Assignment Print View12/1/14, 10:38 PMBond price$b. If immediately upon issue, interest rates dropped to 8 percent, what would be the value of the zerocoupon rate bond? (Assume annual compounding. Do not round intermediate calculations andround your answer to 2 decimal places.)Bond price$c. If immediately upon issue, interest rates increased to 11 percent, what would be the value of the zerocoupon rate bond? (Assume annual compounding. Do not round intermediate calculations andround your answer to 2 decimal places.)Bond price$View Hint #1Worksheet19.Learning Objective: 16-02 Bondyield are important to bond analysisand are influenced by how bondsare rated by major bond ratingagencies.Difficulty: Basicaward:2.00 pointsAssume a zero-coupon bond that sells for $403 will mature in 10 years at $1,250. Use Appendix B for anapproximate answer but calculate your final answer using the formula and financial calculator methods.What is the effective yield to maturity? (Assume annual compounding. Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimal places.)Effective yield to maturity%View Hint #1Worksheet20.Difficulty: BasicLearning Objective: 16-02 Bondyield are important to bond analysisand are influenced by how bondsare rated by major bond ratingagencies.award:1.00 pointYou buy a 7 percent, 25-year, $1,000 par value floating rate bond in 1999. By the year 2014, rates on bondsof similar risk are up to 9 percent.What is your one best guess as to the value of the bond?Value of the bondhttp://ezto.mheducation.com/hm.tpx$Page 10 of 15Assignment Print View12/1/14, 10:38 PMView Hint #1Worksheet21.Difficulty: BasicLearning Objective: 16-02 Bondyield are important to bond analysisand are influenced by how bondsare rated by major bond ratingagencies.award:1.00 pointFourteen years ago, the Archer Corporation borrowed $6,150,000. Since then, cumulative inflation hasbeen 73 percent (a compound rate of approximately 4 percent per year).a. When the firm repays the original $6,150,000 loan this year, what will be the effective purchasing powerof the $6,150,000? (Hint: Divide the loan amount by one plus cumulative inflation.) (Do not roundintermediate calculations and round your answer to the nearest whole dollar.)Effective purchasing power$b. To maintain the original $6,150,000 purchasing power, how much should the lender be repaid? (Hint:Multiply the loan amount by one plus cumulative inflation.) (Do not round intermediate calculationsand round your answer to the nearest whole dollar.)Loan repayment$View Hint #1Worksheet22.Difficulty: IntermediateLearning Objective: 16-02 Bondyield are important to bond analysisand are influenced by how bondsare rated by major bond ratingagencies.award:2.00 pointsA $1,000 par value bond was issued 30 years ago at a 12 percent coupon rate. It currently has 25 yearsremaining to maturity. Interest rates on similar obligations are now 8 percent. Assume Ms. Bright bought thebond three years ago when it had a price of $1,040. Further assume Ms. Bright paid 35 percent of thepurchase price in cash and borrowed the rest (known as buying on margin). She used the interestpayments from the bond to cover the interest costs on the loan.a. What is the current price of the bond? Use Table 16-2. (Input your answer to 2 decimal places.)Price of the bond$b. What is her dollar profit based on the bonds current price? (Do not round intermediate calculationsand round your answer to 2 decimal places.)Dollar profithttp://ezto.mheducation.com/hm.tpx$Page 11 of 15Assignment Print View12/1/14, 10:38 PMc. How much of the purchase price of $1,040 did Ms. Bright pay in cash? (Do not round intermediatecalculations and round your answer to 2 decimal places.)Purchase price paid in cash$d. What is Ms. Brights percentage return on her cash investment? Divide the answer to part b by theanswer to part c. (Do not round intermediate calculations. Input your answer as a percent roundedto 2 decimal places.)Percentage return%View Hint #1Worksheet23.Learning Objective: 16-02 Bondyield are important to bond analysisand are influenced by how bondsare rated by major bond ratingagencies.Difficulty: Intermediateaward:3.00 pointsA $1,000 par value bond was issued five years ago at a coupon rate of 8 percent. It currently has 20 yearsremaining to maturity. Interest rates on similar debt obligations are now 10 percent. Use Appendix B andAppendix D for an approximate answer but calculate your final answer using the formula and financialcalculator methods.a. Compute the current price of the bond using an assumption of semiannual payments. (Do not roundintermediate calculations and round your answer to 2 decimal places.)Current bond price$b. If Mr. Robinson initially bought the bond at par value, what is his percentage capital gain or loss?(Ignore any interest income received. Do not round intermediate calculations and input theamount as a positive percent rounded to 2 decimal places.)Percentage(Click to select)%c. Now assume Mrs. Pinson buys the bond at its current market value and holds it to maturity, what will beher percentage capital gain or loss? (Ignore any interest income received. Do not roundintermediate calculations and input the amount as a positive percent rounded to 2 decimalplaces.)Percentage(Click to select)%d. Why is the percentage gain larger than the percentage loss when the same dollar amounts are involvedin parts b and c?The percentage gain is larger than the percentage loss because the investment is larger.The percentage gain is larger than the percentage loss because the investment is smaller.View Hint #1http://ezto.mheducation.com/hm.tpxPage 12 of 15Assignment Print View12/1/14, 10:38 PMWorksheet24.Learning Objective: 16-02 Bondyield are important to bond analysisand are influenced by how bondsare rated by major bond ratingagencies.Difficulty: Intermediateaward:4.00 pointsThe Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted leaseobligations in the balance sheet, which appeared as follows: Use Appendix D for an approximate answer butcalculate your final answer using the formula and financial calculator methods.In $ millionsCurrent assetsFixed assetsTotal assets$ 160In $ millionsCurrent liabilitiesLong-term liabilities$ 3530Total liabilitiesStockholders' equity$ 8080$ 6595Total liabilities andstockholders' equity$ 160The footnotes stated that the company had $26 million in annual capital lease obligations for the next 25years.a. Discount these annual lease obligations back to the present at a 8 percent discount rate. (Do not roundintermediate calculations. Round your answer to the nearest million. Input your answer inmillions of dollars (e.g., $6,100,000 should be input as "6").)PV of lease obligations$millionb. Construct a revised balance sheet that includes lease obligations. (Do not round intermediatecalculations. Round your answers to the nearest million. Input your answer in millions of dollars(e.g., $6,100,000 should be input as "6").)Current assetsFixed assetsLeased propertyunder capital lease$Balance Sheet (In $ millions)Current liabilitiesLong-term liabilitiesObligations undercapital leaseTotal liabilitiesStockholders' equityTotal assets$Total liabilities andStockholders' equity$$$c. Compute the total debt to total asset ratio for the original and revised balance sheets. (Input yourhttp://ezto.mheducation.com/hm.tpxPage 13 of 15Assignment Print View12/1/14, 10:38 PManswers as a percent rounded to 2 decimal places.)OriginalRevised%%d. Compute the total debt to total equity ratio for the original and revised balance sheets. (Input youranswers as a percent rounded to 2 decimal places.)OriginalRevised%%e. In an efficient capital market environment, should the consequences of SFAS No. 13, as viewed in theanswers to parts c and d, change stock prices and credit ratings?YesNoView Hint #1Worksheet25.Difficulty: ChallengeLearning Objective: 16-04 Longterm lease obligations have manycharacteristics similar to debt andare recognized as a form of indirectdebt by the accounting profession.award:4.00 pointsThe Hardaway Corporation plans to lease a $880,000 asset to the ONeil Corporation. The lease will be for11 years. Use Appendix D for an approximate answer but calculate your final answer using the formula andfinancial calculator methods.a. If the Hardaway Corporation desires a return of 10 percent on its investment, how much should thelease payments be? (Do not round intermediate calculations and round your answer to 2 decimalplaces.)Lease payment$b. If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of $880,000and will pass the benefits along to the ONeil Corporation in the form of lower lease payments (related tothe Hardaway Corporation in the form of lower initial net cost), how much should the revised leasepayments be? The Hardaway Corporation desires a return of 10 percent on the 11-year lease. (Do notround intermediate calculations and round your answer to 2 decimal places.)Revised lease payment$View Hint #1Learning Objective: 16-04 Longterm lease obligations have manyhttp://ezto.mheducation.com/hm.tpxPage 14 of 15Assignment Print View12/1/14, 10:38 PMWorksheethttp://ezto.mheducation.com/hm.tpxDifficulty: Challengecharacteristics similar to debt andare recognized as a form of indirectdebt by the accounting profession.

 

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