The problems below represent the textbook version of the assignment and may differ slightly from the Quizzes version. However, these are more inclusive of the topics and solving them as presented here will give you the information needed to enter the solutions in the Quizzes.
Problem 1
Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of $9 million in the current year. The company is considering the issuance of 1 million additional shares that will net $40 per share to the corporation.
a. What is the immediate dilution potential for this new stock issue?
b. Assume the Louisiana Timber Company can earn 11 percent on the proceeds of the stock issue in time to include them in the current year's results. Should the new issue be undertaken based on earnings per share?
Problem 2
Jordan Broadcasting Company is going public at $50 net per share to the company. There also are founding stockholders that are selling part of their shares at the same price. Prior to the offering, the firm had $26 million in earnings divided over 11 million shares. The public offering will be for five million shares; three million will be new corporate shares and two million will be shares currently owned by the founding stockholders.
a. What is the immediate dilution based on the new corporate shares that are being offered?
b. If the stock has a P/E of 30 immediately after the offering, what will the stock price be?
c. Should the founding stockholders be pleased with the $50 they received for their shares?
Problem 3
An investor must choose between two bonds: Bond A pays $72 annual interest and has a market value of $925. It has 10 years to maturity. Bond B pays $62 annual interest and has a market value of $910. It has two years to maturity.
a. Compute the current yield on both bonds.
b. Which bond should he select based on your answer to part a?
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 8.33 percent. What is the yield to maturity on Bond B?
d. Has your answer changed between parts b and c of this question in terms of which bond to select?
Problem 4
A 17-year, $1,000 par value zero-coupon rate bond is to be issued to yield 7 percent.
a. What should be the initial price of the bond? (Take the present value of $1,000 for 17 years at 7 percent.)
b. If immediately upon issue, interest rates dropped to 6 percent, what would be the value of the zero-coupon rate bond?
c. If immediately upon issue, interest rates increased to 9 percent, what would be the value of the zero-coupon rate bond?
Problem 5
Polycom Systems earned $553 million last year and paid out 25 percent of earnings in dividends.
a. By how much did the company's retained earnings increase?
b. With 100 million shares outstanding and stock price of $101, what was the dividend yield? (Hint: First compute dividends per share.)