Problem 1 (Profit or loss on new stock issue )
Security Brokers Inc. specializes in underwriting new issues by small firms. On a recent offering of Beedles Inc., the terms were as follows:
| Price to public |
$5 per share |
| Number of shares |
3 million |
| Proceeds to Beedles |
$14,000,000 |
The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $300,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price?
a. $5 per share
b. $6 per share
c. $4 per share
Problem 2 ( Underwriting and Flotation Expenses)
The Beranek Company, whose stock price is now $25, needs to raise $20 million in common stock. Underwriters have informed the firm's management that they must price the new issue to the public at $22 per share because of signaling effects. The underwriters' compensation will be 5% of the issue price, so Beranek will net $20.90 per share. The firm will also incur expenses in the amount of $150,000.
How many shares must the firm sell to net $20 million after underwriting and flotation expenses?
Problem 3
The following information is required to work Problems 22-1 and 22-2 Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt. Vandell's debt interest rate is 8%. Assume that the risk-free rate of interest is 5% and the market risk premium is 6%. Both Vandell and Hastings face a 40% tax rate.
Problem 4
Vandell's free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.4. What is the value of Vandell's operations? If Vandell has $10.82 million in debt, what is the current value of Vandell's stock? (Hint: Use the corporate valuation model from Chapter 7.)
Problem 5 (Meger Valuation)
The following information is required to work Problems 22-1 and 22-2 Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt. Vandell's debt interest rate is 8%. Assume that the risk-free rate of interest is 5% and the market risk premium is 6%. Both Vandell and Hastings face a 40% tax rate.
Problem 6
Hastings estimates that if it acquires Vandell, interest payments will be $1.5 million per year for 3 years, after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.472 million, after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 5% rate. What is the unlevered value of Vandell, and what is the value of its tax shields? What is the per share value of Vandell to Hastings Corporation? Assume that Vandell now has $10.82 million in debt.
Problem 7 ( Liquidation)
Southwestern Wear Inc. has the following balance sheet:
| Current assets |
$1,875,000 |
|
Accounts payable |
|
$375,000 |
| Fixed assets |
1,875,000 |
|
Notes payable |
|
750,000 |
|
|
|
|
Subordinated debentures |
|
750,000 |
|
|
|
|
Total debt |
|
|
$1,875,000 |
|
|
|
|
Common equity |
|
1,875,000 |
| Total assets |
|
$3,750,000 |
|
Total liabilities &equity |
|
$3,750,000 |
The trustee's costs total $281,250, and the firm has no accrued taxes or wages. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $2.5 million is received from sale of the assets?
Attachment:- Financial Management.xlsx