BUSI-320 Corporate Finance-2013 Fall-B (Moten)) homwork 7

Question
MC Qu. 62 Which of the following statements concerning…

Which of the following statements concerning futures markets is false?

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Futures markets allow investors to manage risk.

Futures markets can be used to hedge against changing commodity prices.

Interest rate futures can be used to hedge against the risk of rising interest rates.

All of the statements above are true.

MC Qu. 63 All of the following are recognized as an…

All of the following are recognized as an important influences in the development of the banking crisis of 2008 and the resulting credit crisis EXCEPT:

Consumers, especially homeowners, took on too much debt.

Real estate prices collapsed.

Too many subprime loans were repackaged and sold as securities.

The IMF bailed out Freddie Mac and Fannie Mae.

MC Qu. 65 Evidence of how global markets are linked…

Evidence of how global markets are linked was provided in 1997 and 1998 when international markets reacted to

the collapse of Asian currencies in Thailand, Indonesia, Malaysia and Korea.

Russia’s default on its sovereign debt.

Japan’s seven years of economic stagnation.

a and b are true.

MC Qu. 68 The European Monetary Union (EMU) which came…

The European Monetary Union (EMU) which came into effect in January of 1999 includes

Britain, France, Germany, Spain, Italy and 6 other European countries.

The establishment of a new European Central Bank to coordinate monetary policy for the Euro-zone countries.

A new currency called the Euro, which will be put into circulation in all EMU countries no later than 2009.

All of these.

MC Qu. 70 During the next ten years, the major threat …

During the next ten years, the major threat to the dominance of the U.S. money and capital markets will come from

The Euro-zone countries comprising the European Monetary Union and a single currency.

The huge Chinese economy and its billion plus people.

Russia’s difficulty in transforming its economy into a capitalistic one.

Japan’s prolonged recession and banking crisis.

MC Qu. 76 Corporations prefer bonds over preferred…

Corporations prefer bonds over preferred stock for financing their operations because

preferred stocks require a dividend.

bond interest rates change with the economy while stock dividends remain constant.

the after-tax cost of debt is less than the cost of preferred stock.

none of these.

MC Qu. 77 In general when interest rates are expected …

In general when interest rates are expected to rise, financial managers

accept more risk.

try to lock in long-term financing at low cost.

rely more on internal sources of funds rather than external sources.

balance the company’s debt structure with more short-term debt and less long-term debt.

MC Qu. 80 The major supplier of funds for investment…

The major supplier of funds for investment in the whole economy is

households.

businesses.

government.

financial institutions.

MC Qu. 92 Security markets are efficient when each of …

Security markets are efficient when each of the following exist except

the markets can absorb large dollar amounts of stock without destabilizing the price.

security prices follow the leading indicators such as the DJIA very closely.

prices adjust rapidly to new information.

there is a continuous market where each successive trade is made at a price close to the previous trade

one of these

MC

require that all securities sold in more than one state be registered with the SEC.

MC Qu. 101 The Securities Exchange Act of 1934 is…

The Securities Exchange Act of 1934 is primarily concerned with

original issues of securities.

a central market system.

regulation of organized exchanges.

protecting customers of bankrupt securities firms.

Problem 15-3 Dilution effect of stock issue [LO3]

American Health Systems currently has 5,500,000 shares of stock outstanding and will report earnings of $16 million in the current year. The company is considering the issuance of 1,800,000 additional shares that will net $40 per share to the corporation.

.gif” alt=”correct”>

Kevin’s Bacon Company Inc. has earnings of $8 million with 2,100,000 shares outstanding before a public distribution. Eight hundred thousand shares will be included in the sale, of which 500,000 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 for the offering will be $24.50 and the corporate proceeds are expected to produce $1.6 million in corporate earnings.

(a)

What were the corporation’s earnings per share before the offering? (Enter your answer in dollars not in millions. Round your answer to 2 decimal places. Omit the “$” sign in your response.)

Earnings per share

$ .gif” alt=”correct”>

(b)

What are the corporation’s earnings per share expected to be after the offering? (Enter your answer in dollars not in millions. Round your answer to 2 decimal places. Omit the “$” sign in your response.)

Earnings per share

$ .gif” alt=”incorrect”>

19.

award:
1 out of
1.00 point

Problem 15-12 Market Stabilization and risk [LO2]

Becker Brothers is the managing underwriter for a 1.5-million-share issue by Jay’s Hamburger Heaven. Becker Brothers is “handling” 8 percent of the issue. Its price is $20 per share and the price to the public is $23.50.
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 $22.00. They later sell the shares at an average value of $21.00.

Compute Becker Brothers’ overall gain or loss from managing the issue. (Input the amount as positive value. Enter your answer in dollars not in millions. Omit the “$” sign in your response.)

Net gain .gif” alt=”correct”>

.gif” alt=”correct”>

20.

award:
1 out of
1.00 point

Problem 15-14 Underwriting costs [LO2]

Winston Sporting Goods is considering a public offering of common stock. Its investment banker has informed the company that the retail price will be $19.00 per share for 590,000 shares. The company will receive $17.40 per share and will incur $160,000 in registration, accounting, and printing fees.

(a-1)

What is the spread on this issue in percentage terms? (Round your intermediate calculations and final answer to 2 decimal places. Omit the ” % ” sign in your response.)

Spread

.gif” alt=”correct”> %

(a-2)

What are the total expenses of the issue as a percentage of total value (at retail)? (Round your intermediate calculations and final answer to 2 decimal places. Omit the ” % ” sign in your response.)

Expenditure percentage

.gif” alt=”correct”> %

(b)

If the firm wanted to net $14.63 million from this issue, how many shares must be sold?

Shares

.gif” alt=”correct”>

21.

award:
0 out of
1.00 point

Problem 15-15 P/E ratio for new public issue [LO1]

Slightly above average

Average

Quality of management

High

Average

Assume, in assessing the in

award:
1 out of
1.0

2.00 points

Pr

%

Explanation:

(a)

=

.

=

$65

=

5.65%

$1150

27.

award:
1.60 out of
2.00 points

Problem 16-3 Bond yields [LO2]

An investor must choose between two bonds:

Bond A pays $70 annual interest and has a market value of $845. It has 5 years to maturity.

B

Bond B

(c)

A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond A is 11.14 percent. What is the approximate yield to maturity on Bond B? (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

Approximate yield to maturity

%

(d)

Has your answer changed between parts b and c of this question in terms of which bond to select?

No

rev: 01_11_2013

28.

award:
1 out of
1.00 point

Problem 16-5 Secured vs. unsecured debt [LO1]

Match the security provisions with the yield to maturity.

(1)

(2)

Security provision

Yield to maturity

(a) Debenture

9.20 %

(b) Secured debt

11.50 %

(c) Subordinate debenture

10.20 %

(a) Debenture

.gif” alt=”correct”>

(b) Secured debt

.gif” alt=”correct”>

(c) Subordinate debenture

.gif” alt=”correct”>

(c)

PV of inflows

$

1,266,164

PV of outflows

1,621,116

Net present value

$

-354,952

(d)

Do not refund the old issue (particularly if it is perceived that interest rates will go down even more).

37.

award:
0 out of
1.00 point

Problem 16-19 Call premium [LO3]

The Robinson Corporation has $46 million of bonds outstanding that were issued at a coupon rate of 8 3/4 percent seven years ago. Interest rates have fallen to 7 3/4 percent. Mr. Brooks, the vice-president of finance, does not expect rates to fall any further. The bonds have 16 years left to maturity, and Mr. Brooks would like to refund the bonds with a new issue of equal amount also having 16 years to maturity. The Robinson Corporation has a tax rate of 30 percent. The underwriting cost on the old issue was 2.7 percent of the total bond value. The underwriting cost on the new issue will be 2 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a 8.5 percent call premium starting in the sixth year and scheduled to decline by one-half percent each year thereafter. (Consider the bond to be 7 years old for purposes of computing the premium). Assume the discount rate is equal to the aftertax cost of new debt rounded to the nearest whole number.

What would be the aftertax cost of the call premium at the end of year 11 (in dollar value)? (Omit the “$” sign in your response.)

Aftertax cost of the call premium

$

Explanation:

The Robinson Corporation Call premium (aftertax cost)

7 years of 1/2% deductions (5th through 11th year) = 2 1/2%

8 1/2

%

Call premium

?2 1/2

%

6

%

Call premium at the end of the 11th year

$ 46,000,000 × 6% = $ 2,760,000

$ 2,760,000 (1 – .30) = $ 1,932,000

38.

award:
2 out of
2.00 points

Problem 16-20 Capital lease or operating lease [LO4]

The Deluxe Corporation has just signed a 192-month lease on an asset with a 21-year life. The minimum lease payments are $1,500 per month ($18,000 per year) and are to be discounted back to the present at a 11 percent annual discount rate. The estimated fair value of the property is $175,000. Use .mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix D.

(a)

Calculate the lease period as a percentage to the estimated life of the leased property. (Round your answer to the nearest whole percent. Omit the “%” sign in your response.)

Lease period

.gif” alt=”correct”> %

(b)

Calculate the present value of lease payments as a percentage to the fair value of the property. (Round “PV Factor” to 3 decimal places. Round your intermediate and final answer to 1 decimal place. Omit the “%” sign in your response.)

Present value of lease payments

.gif” alt=”correct”> %

(c)

Should the lease be recorded as a capital lease or an operating lease?

Capital lease .gif” alt=”correct”>

39.

award:
3 out of
3.00 points

Problem 16-21 Balance sheet effect of leases [LO4]

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: Use .mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix D.

In $ millions

In $ millions

Current assets

$

65

Current liabilities

$

20

Fixed assets

65

Long-term liabilities

35

Total liabilities

$

55

Stockholders’ equity

75

Total assets

$

130

Total liabilities and
stockholders’ equity

$

130

The footnotes stated that the company had $23 million in annual capital lease obligations for the next 10 years.

(a)

Discount these annual lease obligations back to the present at a 12 percent discount rate. (Enter your answers in millions rounded to nearest whole number. Round “PV Factor” to 3 decimal places. Omit the “$” sign in your response.)

Annual lease obligations

$.gif” alt=”correct”> million

(b)

Construct a revised balance sheet that includes lease obligations. (Enter your answers in millions rounded to nearest whole number. Round “PV Factor” to 3 decimal places. Omit the “$” sign in your response.)

Balance Sheet (in millions)

Current assets

$5 .gif” alt=”correct”>

Current liabilities

$ .gif” alt=”correct”>

Fixed assets

.gif” alt=”correct”>

Long-term liabilities

.gif” alt=”correct”>

Leased property
under capital lease

.gif” alt=”correct”>

Obligations under
capital lease

.gif” alt=”correct”>

Total liabilities

.gif” alt=”correct”>

Stockholders’ equity

.gif” alt=”correct”>

Total assets

$ .gif” alt=”correct”>

Total liabilities and
Stockholders’ equity

$ .gif” alt=”correct”>

(c)

Compute total debt to total assets on the original and revised balance sheets. (Round your answer to 1 decimal place. Omit the “%” sign in your response.)

Original

.gif” alt=”correct”> %

Revised

.gif” alt=”correct”> %

(d)

Compute total debt to equity on the original and revised balance sheets. (Round your answer to 1 decimal place. Omit the “%” sign in your response.)

Original

7 .gif” alt=”correct”> %

Revised

.gif” alt=”correct”> %

rev: 07-25-2011

0.

award:
2 out of
2.00 points

Problem 16-22 Determining size of lease payments [LO4]

The Hardaway Corporation plans to lease a $870,000 asset to the O’Neil Corporation. The lease will be for 10 years. Use .mhhe.com/connect/0073530727/Images/Appendix_D.JPG”>Appendix D.

(a)

If the Hardaway Corporation desires a 9 percent return on its investment, how much should the lease payments be? (Round “PV Factor” to 3 decimal places. Round your answer to the nearest dollar amount. Omit the “$” sign in your response.)

Lease payment

$6 .gif” alt=”correct”>

(b)

The Hardaway Corporation is able to take a 10 percent deduction from the purchase price of $870,000 and will pass the benefits along to the O’Neil Corporation in the form of lower lease payments, (related to the Hardaway Corporation in the form of lower initial net cost), how much should the revised lease payments be? The Hardaway Corporation desires a 9 percent return on the 10-year lease. (Round “PV Factor” to 3 decimal places. Round your answer to the nearest dollar amount. Omit the “$” sign in your response.)

Revised lease payment

$ 122,001 .gif” alt=”correct”>

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