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Chapter 5: 11DQ (page 493)
What is privatization?
In the process of privatization, investment bankers sell companies owned by the government to private individuals or authorities.
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Discuss the reason for the differences between underwriting spreads for stocks and bonds.
Assume Sybase Software is thinking about three different size offerings for issuance of additional shares.
Size of Offer Public Price Net to Corporation
a. 1.1 million................. \(30 \)27.50
b. 7.0 million…………… \(30 \)28.44
c. 28.0 million………… \(30 \)29.15
What is the percentage underwriting spread for each size offer?
How would you define efficient security markets?
Question: 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 now 6 percent. The $30 million, 15-year bond issue that his firm has outstanding was initially issued at 9 percent five years ago. Because interest rates had gone down so much, he was considering refunding the bond issue. The old issue had a call premium of 8 percent. The underwriting cost on the old issue had been 3 percent of par, and on the new issue it would be 5 percent of par. The tax rate would be 30 percent and a 4 percent discount rate would be applied for the refunding decision. The new bond would have a 10-year life. Before Barton used the 8 percent call provision to reacquire the old bonds, he wanted to make sure he could not buy them back cheaper in the open market.
b. Compare the price in part a to the 8 percent call premium over par value. Which appears to be more attractive in terms of reacquiring the old bonds?
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.
b. Compute the earnings per share immediately before the stock issue.
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