Chapter 5: Q8DQ (page 594)
How is a stock split (versus a stock dividend) treated on the financial statements of a corporation?
The stock split results in a reduction in the value of one stock and an increase in the number of outstanding shares in the common stock account.
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What method of “bond repayment” reduces debt and increases the amount of common stock outstanding? (LO16-3)
Question: The management of Mitchell Labs decided to go private in 2002 by buying in all 2.80 million of its outstanding shares at \(24.80 per share. By 2006, management had restructured the company by selling off the petroleum research division for \)10.75 million, the fiber technology division for \(8.45 million, and the synthetic products division for \)20 million. Because these divisions had been only marginally profitable, Mitchell Labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of $1.10 this year. Investment bankers have contacted the firm and indicated that if it re-entered the public market, the 2.80 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 15 times earnings per share.
c. What is the percentage return to the management of Mitchell Labs from the restructuring? Use answers from parts a and b to determine this value
The Pioneer Petroleum Corporation has a bond outstanding with an \(85 annual interest payment, a market price of \)800, and a maturity date in five years. Find the following:
a. The coupon rate.
b. The current rate.
c. The yield to maturity
Tiger Golf Supplies has $25 million in earnings with 7 million shares outstanding. Its investment banker thinks the stock should trade at a P/E ratio of 31. Assume there is an underwriting spread of 7.8 percent. What should the price to the public be?
The Hardaway Corporation plans to lease a \(740,000 asset to the O’Neil Corporation. The lease will be for 11 years.
b. If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of \)740,000 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 13 percent return on the 11-year lease
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