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Two Finance Problems - Oxford Corp. and Tuttle Buildings Inc.




Question;Question 1.1. (TCO D) Oxford Corp. is considering refunding a $30,000,000, annual payment, 12% coupon, 30-year bond issue that was issued 5 years ago. It has been amortizing $2 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 10% in today's market. A call premium of 12% would be required to retire the old bonds, and flotation costs on the new issue would amount to $2 million. Oxford's marginal tax rate is 30%. The new bonds would be issued when the old bonds are called. What is the required after-tax refunding investment outlay, that is, the cash outlay at the time of the refunding? Question 2.2. Tuttle Buildings Inc. has decided to go public by selling $5,000,000 of new common stock. Its investment bankers agreed to take a smaller fee now (6% of gross proceeds versus their normal 10%) in exchange for a 1-year option to purchase an additional 200,000 shares at $5.00 per share. The investment bankers expect to exercise the option and purchase the 200,000 shares in exactly 1 year, when the stock price is forecasted to be $6.50 per share. However, there is a chance that the stock price will actually be $12.00 per share 1 year from now. If the $12 price occurs, what would the present value of the entire underwriting compensation be? Assume that the investment banker's required return on such arrangements is 15% and ignore taxes.


Paper#48817 | Written in 18-Jul-2015

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