Investing Banking & Long-term debt and lease financing
Complete the following questions and please show your work.
1.) American Health Systems currently has 6,400,000 shares of stock outstanding and will report earnings of $10 million in the current year. The company is
considering the issuance of 1,700,000 additional shares that will net $30 per share to the corporation.
a. What is the immediate dilution potential for this new stock issue?
b. Assume that American Health Systems can earn 9 percent on the proceeds of the stock issue in time to include them in the current year’s results. Calculate
earnings per share. Should the new issue be undertaken based on earnings per share?
2.) Using the information in Problem 3, assume that American Health Systems’ 1,700,000 additional shares can only be issued at $18 per share.
a. Assume that American Health Systems can earn 6 percent on the proceeds. Calculate earnings per share.
b. Should the new issue be undertaken based on earnings per share?
3.) Assume Sybase Software is thinking about three different size offerings for issuance of additional shares.
Size of Offer Public Prize Net to Corporation
a. 1.1 million $30 $27.50
b. 7.0 million $30 $28.44
c. 28.0 million $30 $29.10
What is the percentage underwriting spread for each size offer?
4.) 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.
a. Compute the net proceeds to the Presley Corporation.
b. Compute the earnings per share immediately before the stock issue.
c. Compute the earnings per share immediately after the stock issue.
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.
e. Determine what rate of return must be earned on the proceeds to the corporation so there will be a 5 percent increase in earnings per share during the year of
going public.
5.) An investor must choose between two bonds: Bond 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. Assume the par value of bonds is $1,000.
a. Compute the current yield on both bonds.
b. Which bond should she 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 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?
6.) Cox Media Corporation pays an 11 percent coupon rate on debentures that are due in 10 years. The current yield to maturity on bonds of similar risk is 8
percent. The bonds are currently callable at $1,110. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds.
a. Find the market value of the bonds using semiannual analysis.
b. Do you think the bonds will sell for the price you arrived at in part a? Why?
7.) The Bowman Corporation has a $18 million bond obligation outstanding, which it is considering refunding. Though the bonds are 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.
a. Calculate the present value of the total outflows.
b. Calculate the present value of the total inflows.
c. Calculate the net present value.
d. Should the old issue be refunded with new debt?
Chapter 15
Investment Banking: Public and Private Placement
#1. Underwriting spread (LO15-2) Walton and Company is the managing investment banker for a major new underwriting. The price of the stock to the investment banker
is $23 per share. Other syndicate members may buy the stock for $24.25. The price to the selected dealers group is $24.80, with a price to brokers of $25.20. Finally,
the price to the public is $29.50.
a. If Walton and Company sells its shares to the dealer group, what will the percentage return be?
b. If Walton and Company performs the dealer’s function also and sells to brokers, what will the percentage return be?
c. If Walton and Company fully integrates its operation and sells directly to the public, what will its percentage return be?
Solution: Walton and Company
a. $24.80 Selected Dealer Group’s Price
23.00 Managing Investing Banker’s Price
$ 1.80 Differential
$ 1.80 = 7.83% Return
$23.00
b. $25.20 Broker’s Price
23.00 Managing Investing Banker’s Price
$2.20 Differential
$ 2.20 = 9.57% Return
23.00
c. $29.50 Public Price
23.00 Managing Investing Banker’s Price
$ 6.50 Differential
$ 6.50 = 28.26% Return
#2 Bond value (LO16-2) The Florida Investment Fund buys 58 bonds of the Gator Corporation through a broker. The bonds pay 10 percent annual interest. The yield to
maturity (market rate of interest) is 12 percent. The bonds have a 10-year maturity.
Using an assumption of semiannual interest payments:
a. Compute the price of a bond (refer to “Semiannual Interest and Bond Prices” in Chapter 10 for review if necessary).
b. Compute the total value of the 58 bonds.
Solution:
Florida Investment Company
a. Present value of interest payments
PVA = A × PVIFA (n = 20, i = 6%) Appendix D
PVA = $50 × 11.470 = $573.50
Present value of principal payment at maturity
PV = FV × PVIF (n = 20, i = 6%) Appendix B
PV = $1,000 × .312 = $312.00
Total present value
Present value of interest payments $573.50
Present value of payment at maturity 312.00
Total present value or price of the bond $885.50
b. Value of 58 bonds
$ 885.50
× 58
$51,359.00
(a)
N I/Y PV PMT FV
20 6 CPT PV –885.30 50 1,000
