Case 22 ? Precision Tool Company

• Using the data in Table 2, calculate the total flotation costs as a percentage of external funds raised. How does this amount compare with published averages for the cost of selling new common stock?
• Assume that Precision Tool?s stock price one year from now has the following probability distribution:
• What is the additional expected dollar benefit to Aberwald, Butler, Van Buren & Company from the option package?
• Disregarding the time value of money, what would be the total underwriting expense expressed as a percentage of funds raised?
• Considering that the public would be paying $8.50 per share, should Rodriguez and Fulton be allowed to purchase their shares for $1.00? Should the public be informed that the ?insiders? are paying a lower price, and if so, how?
• In light of your answer to Question 3, should Aberwald, Butler, Van Buren & Company be allowed to purchase its shares for $1.00 per share?
• As stated at the beginning of the case, Rodriguez and Fulton are motivated partly by the urge to own and run their own firm. What would be the partners? ownership position under the proposal?
• One goal of the proposal is to generate excess cash now that could potentially be used in the future for acquisitions. What are the pros and cons of raising the funds now rather than when needed?
• Now consider the junk food financing alternative.
• Construct a pro forma income statements for 1993 for the two financing alternatives.
• What are the times-interest-earned, fixed charge coverage, and cash flow coverage ratios under each alternative?

What should Rodriguez and Fulton?s final decision be? Fully support your answer. Are there any other financing alternatives that should be considered?