Chapter 5: 8DQ (page 451)
Question Preferred stock is often referred to as a hybrid security. What is meant by this term as applied to preferred stock?
Answer
The preferred stock carries the characteristics of both debt instruments and shares and therefore, it is referred to as a hybrid security.
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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.
c. Compute the earnings per share immediately after the stock issue.
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.
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.
Assume Sybase Software is thinking about three different size offerings for issuance of additional shares.
Size of Offer Public Price Net to Corporation
a. 1.1 million................. \(30 \)27.50
b. 7.0 million…………… \(30 \)28.44
c. 28.0 million………… \(30 \)29.15
What is the percentage underwriting spread for each size offer?
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.
b. Calculate the present value of total inflows.
The Wrigley Corporation needs to raise \(44 million. The investment banking firm of Tinkers, Evers & Chance will handle the transaction.
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