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Corporate Finance
Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 15 percent annual interest. The current yield to maturity on such bonds in the market is 17 percent. Compute the price of the
Kilgore Natural Gas has a $1,000 par value bond outstanding that pays 9 percent annual interest. The current yield to maturity on such bonds in the market is 12 percent. Compute the price of the
Toxaway Telephone Company has a $1,000 par value bond outstanding that pays 6 percent annual interest. If the yield to maturity is 8 percent, and remains so over the remaining life of the bond, the
Go to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) decline from 11 percent to 8 percent:a. What is the bond
Go to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) increase from 9 to 12 percent.a. What is the bond price at 9
Using Table assume interest rates in the market (yield to maturity) are 14 percent for 20 years on a bond paying 10 percent.a. What is the price of the bond?b. Assume five years have passed and
a. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. Using column 2, indicate what the bond price will be with a 10-year, a 15-year, and a
Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His broker quotes a price of $1,180. Jim is concerned that the bond might be overpriced based on the facts
Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 15 percent. This return was in line with the
Katie Pairy Fruits Inc. has a $1,000, 20-year bond outstanding with a nominal yield of 15 percent (coupon equals 15% × $1,000 = $150 per year). Assume that the current market-required interest rate
Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 40-year life when issued and the annual interest payment was then 12 percent. This return was in line with the required
Wilson Oil Company issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 15 percent. This return was in line with the
Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The
Bonds issued by the Coleman Manufacturing Company have a par value of $1,000, which of course is also the amount of principal to be paid at maturity. The bonds are currently selling for $690. They
Stilley Resources bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 5 percent. If the price of the bond is $841.51, what is
Evans Emergency Response bonds have 6 years to maturity. Interest is paid semiannually. The bonds have a $1,000 par value and a coupon rate of 8 percent. If the price of the bond is $1,073.55, what
Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest rate of 11 percent and the interest is paid semiannually. The yield to
You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 10 percent, which is paid semiannually.
North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend of $6 per share. With the passage of time, yields have soared from the original 6 percent to 14 percent
X-Tech Company issued preferred stock many years ago. It carries a fixed dividend of $12.00 per share. With the passage of time, yields have soared from the original 10 percent to 17 percent (yield
Ecology Labs Inc. will pay a dividend of $6.40 per share in the next 12 months (D1). The required rate of return (Ke) is 14 percent and the constant growth rate is 5 percent.a. Compute P0.(For parts
Maxwell Communications paid a dividend of $3 last year. Over the next 12 months, the dividend is expected to grow at 8 percent, which is the constant growth rate for the firm (g). The new dividend
Justin Cement Company has had the following pattern of earnings per share over the last five years: YearEarnings per Share2006 ............. $5.002007 ............5.302008 ............5.622009
A firm pays a $4.80 dividend at the end of year one (D1), has a stock price of $80, and a constant growth rate (g) of 5 percent. Compute the required rate of return (Ke).
A firm pays a $1.50 dividend at the end of year one (D1), has a stock price of $155 (P0), and a constant growth rate (g) of 10 percent.a. Compute the required rate of return (Ke). Indicate whether
Trump Office Supplies paid a $3 dividend last year. The dividend is expected to grow at a constant rate of 7 percent over the next four years. The required rate of return is 14 percent (this will
Beasley Ball Bearings paid a $4 dividend last year. The dividend is expected to grow at a constant rate of 2 percent over the next four years. The required rate of return is 15 percent (this will
Mel Thomas, the chief financial officer of Preston Resources, has been asked to do an evaluation of Dunning Chemical Company by the president and Chair of the Board, Sarah Reynolds. Preston Resources
Surgical Supplies Corporation paid a dividend of $1.12 per share over the last 12 months. The dividend is expected to grow at a rate of 25 percent over the next three years (supernormal growth). It
What is the difference between a bond agreement and a bond indenture?
Take the following list of securities and arrange them in order of their priority of claims:Preferred stock ......... Senior debentureSubordinated debenture ...... Senior secured debtCommon stock
Under what circumstances would a call on a bond be exercised by a corporation? What is the purpose of a deferred call?
Discuss the relationship between bond prices and interest rates. What impact do changing interest rates have on the price of long-term bonds versus short-term bonds?
What is the difference between the following yields: coupon rate, current yield, and yield to maturity?
Bonds of different risk classes will have a spread between their interest rates. Is this spread always the same? Why?
Explain how the bond refunding problem is similar to a capital budgeting decision.
What cost of capital is generally used in evaluating a bond refunding decision? Why?
Explain how floating rate bonds can save the investor from potential embarrassments in portfolio valuations.
Discuss the advantages and disadvantages of debt.The primary advantages of debt are:a. Interest payments are tax deductible.b. The financial obligation is clearly specified and of a fixed nature.c.
Explain how the zero-coupon rate bond provides a return to the investor. What are the advantages to the corporation?
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
Preston Corporation has a bond outstanding with an $80 annual interest payment, a market price of $1,250, and a maturity date in 10 years. Assume the par value of the bonds is $1,000.Find the
Harold Reese must choose between two bonds:Bond X pays $95 annual interest and has a market value of $900. It has 10 years to maturity.Bond Z pays $95 annual interest and has a market value of $920.
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.
Match the yield to maturity in column 2 with the security provisions (or lack thereof) in column 1. Higher returns tend to go with greater risk.(1)Security Provisiona. Debentureb. Secured debtc.
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
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
The yield to maturity for 10-year bonds is as follows for four different bond rating categories:The bonds of Falter Corporation were rated as Aaa and issued at par a few weeks ago. The bonds have
A previously issued A2, 15-year industrial bond provides a return three-fourths higher than the prime interest rate of 11 percent. Previously issued A2 public utility bonds provide a yield of
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,
Assume a zero-coupon bond that sells for $403 and will mature in 10 years at $1,250. What is the effective yield to maturity? (Compute PVIF and go to Appendix B for the 10-year figure to find the
Seventeen years ago, the Archer Corporation borrowed $6,500,000. Since then, cumulative inflation has been 65 percent (a compound rate of approximately 3 percent per year).a. When the firm repays the
A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It currently has 15 years remaining to maturity. Interest rates on similar obligations are now 8 percent.a. What is the
A $1,000 par value bond was issued 20 years ago at a 9 percent coupon rate. It currently has five years remaining to maturity. Interest rates on similar debt obligations are now 10 percent.a.
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
The Robinson Corporation has $43 million of bonds outstanding that were issued at a coupon rate of 11¾ percent seven years ago. Interest rates have fallen to 10¾ percent. Mr. Brooks, the
The Sunbelt Corporation has $40 million of bonds outstanding that were issued at a coupon rate of 12⅞ percent seven years ago. Interest rates have fallen to 12 percent. Mr. Heath, the
The Deluxe Corporation has just signed a 168-month lease on an asset with a 19-year life. The minimum lease payments are $1,300 per month ($15,600 per year) and are to be discounted back to the
The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows:The footnotes stated that the company
The Hardaway Corporation plans to lease a $740,000 asset to the O’Neil Corporation. The lease will be for 11 years.a. If the Hardaway Corporation desires a 13 percent return on its investment, how
Twenty-five-year B-rated bonds of Parker Optical Company were initially issued at a 12 percent yield. After 10 years, the bonds have been upgraded to Aa2. Such bonds are currently yielding 10 percent
Barton Simpson, the chief financial officer of Broadband Inc. could hardly believe the change in interest rates that had taken place over the last few months. The interest rate on A2 rated bonds was
What is the difference between technical insolvency and bankruptcy?
What are the four types of out-of-court settlements? Briefly describe each.
What is the difference between an internal reorganization and an external reorganization under formal bankruptcy procedures?
The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders’ claims are
Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If the company purchases the asset, the cost will be
Why might the portfolio effect of a merger provide a higher valuation for the participating firms?
What is the difference between horizontal integration and vertical integration? How does antitrust policy affect the nature of mergers?
What is synergy? What might cause this result? Is there a tendency for management to over- or underestimate the potential synergistic benefits of a merger?
If a firm wishes to achieve immediate appreciation in earnings per share as a result of a merger, how can this be best accomplished in terms of exchange variables? What is a possible drawback to this
It is possible for the postmerger P/E ratio to move in a direction opposite to that of the immediate postmerger earnings per share. Explain why this could happen.
What is a typical merger premium paid in a merger or acquisition? What effect does this premium have on the market value of the merger candidate and when is most of this movement likely to take place?
Suggest some ways in which firms have tried to avoid being part of a target takeover.
The Clark Corporation desires to expand. It is considering a cash purchase of Kent Enterprises for $3 million. Kent has a $700,000 tax loss carryforward that could be used immediately by the Clark
Assume that Western Exploration Corp. is considering the acquisition of Ogden Drilling Company. The latter has a $470,000 tax loss carryforward. Projected earnings for the Western Exploration Corp.
J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $4,500,000. Patterson will provide the following pattern of cash inflows and synergistic benefits for the next
Worldwide Scientific Equipment is considering a cash acquisition of Medical Labs for $1.6 million. Medical Labs will provide the following pattern of cash inflows and synergistic benefits for the
Assume the following financial data for Rembrandt Paint Co. and Picasso Art Supplies:a. If all the shares of Rembrandt Paint Co. are exchanged for those of Picasso Art Supplies on a share-for-share
Assume the following financial data for the Noble Corporation and Barnes Enterprises:a. If all the shares of the Noble Corporation are exchanged for those of Barnes Enterprises on a share-for-share
The Jeter Corporation is considering acquiring the A-Rod Corporation. The data for the two companies are as follows:a. The Jeter Corp. is going to give A-Rod Corp. a 60 percent premium over A-Rod's
The Hollings Corporation is considering a two-step buyout of the Norton Corporation. The latter firm has 2.5 million shares outstanding and its stock price is currently $40 per share. In the two-step
Al Simpson helped start Excel Systems in 2010. At the time, he purchased 116,000 shares of stock at $1 per share. In 2015, he has the opportunity to sell his interest in the company to Folsom Corp.
Chicago Savings Corp. is planning to make an offer for Ernie’s Bank & Trust. The stock of Ernie’s Bank & Trust is currently selling for $44 a share.a. If the tender offer is planned at a
Assume the Knight Corporation is considering the acquisition of Day Inc. The expected earnings per share for the Knight Corporation will be $4.00 with or without the merger. However, the standard
General Meters is considering two mergers. The first is with Firm A in its own volatile industry, the auto speedometer industry, while the second is a merger with Firm B in an industry that moves in
If common stockholders are the owners of the company, why do they have the last claim on assets and a residual claim on income?
Why might management use a poison pill strategy?
Preferred stock is often referred to as a hybrid security. What is meant by this term as applied to preferred stock?
What is the most likely explanation for the use of preferred stock from a corporate viewpoint?
A small amount of preferred stock is participating. What would your reaction be if someone said common stock is also participating?
During a rights offering, the underlying stock is said to sell “rights-on” and “ex-rights.” Explain the meaning of these terms and their significance to current stockholders and potential
Why is the cumulative feature of preferred stock particularly important to preferred stockholders?
Put an X by the security that has the feature best related to the following considerations. a. Ownership and control of the firmb. Obligation to provide returnc. Claims to assets in bankruptcyd. High
Folic Acid Inc. has $20 million in earnings, pays $2.75 million in interest to bondholders, and $1.80 million in dividends to preferred stockholders.a. What are the common stockholders’ residual
Time Watch Co. has $46 million in earnings and is considering paying $6.45 million in interest to bondholders and $4.35 million to preferred stockholders in dividends.a. What are the bondholders’
Katie Homes and Garden Co. has 10,640,000 shares outstanding. The stock is currently selling at $52 per share. If an unfriendly outside group acquired 25 percent of the shares, existing stockholders
Mr. Meyers wishes to know how many shares are necessary to elect 5 directors out of 14 directors up for election in the Austin Power Company. There are 150,000 shares outstanding. (Use Formula 17-1
Dr. Phil wishes to know how many shares are necessary to elect 6 directors out of 14 directors up for election for the board of the Winfrey Publishing Company. There are 340,000 shares outstanding.
Carl Hubbell owns 6,001 shares of the Piston Corp. There are 12 seats on the company board of directors, and the company has a total of 78,000 shares of stock outstanding. The Piston Corp. utilizes
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