Chapter 5: 4DQ (page 493)
Discuss the reason for the differences between underwriting spreads for stocks and bonds.
The major reason for the difference between underwriting spreads for stocks and bonds is the amount paid by the issuer and proceeds.
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How might a leveraged buyout eventually lead to high returns for a company?
In which foreign industry has privatization been most important?
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.
a. How many shares of stock must be sold to net $21,120,000? (Note: No out-of-pocket costs must be considered in this problem.)
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:
In \( millions | In \) millions | ||
Current assets | \(70 | Current liabilities | \)30 |
Fixed assets | \(70 | Long-term liabilities | \)30 |
Total liabilities | \(60 | ||
Stockholder’s equity | \)80 | ||
Total assets | \(140 | Total stockholder’s equity and liabilities | \)140 |
The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.
f. Comment on management’s perception of market efficiency (the viewpoint of the financial officer).
Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.
e. Determine what rate of return must be earned on the proceeds to the corporation so there will be a 10 percent increase in earnings per share during the year of going public.
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