Chapter 5: 13BP (page 496)

Trump Card Co. will issue stock at a retail (public) price of $32. The company will receive $29.20 per share.
a. What is the spread on the issue in the percentage terms?
b. If the firm demands receiving a new price only $2.20 below the public price suggested in part a, what will the spread be in percentage terms?
c. To hold the spread down to 2.5 percent based on the public price in part a, what net amount should Trump Card Co. receive?

Short Answer

Expert verified

a. Percentage spread on the issue of stock is 8.75%.

b. New percentage spread is 6.875%

c. Net amount that should be received by the company is $31.20.

Step by step solution

Computation of spread percentage

$P e r c e n t a g e s p r e a d = \frac{R e t a i l p r i c e - N e t t o c o r p o r a t i o n}{R e t a i l p r i c e} \times 100 = \frac{$ 32 - $ 29.20}{$ 32} \times 100 = \frac{$ 2.80}{$ 32} \times 100 = 8.75 %$

Computation of new spread

$N e w p r i c e p e r s h a r e = P u b l i c p r i c e - D e c r e a s e d v a l u e = $ 32 - $ 2.20 = $ 29.80$

$N e w P e r c e n t a g e s p r e a d = \frac{P u b l i c p r i c e - N e t t o c o r p o r a t i o n}{P u b l i c p r i c e} \times 100 = \frac{$ 32 - $ 29.80}{$ 32} \times 100 = \frac{$ 2.20}{$ 32} \times 100 = 6.875 %$

Computation of net amount

$P e r c e n t a g e s p r e a d = \frac{P u b l i c p r i c e - N e t t o c o r p o r a t i o n}{P u b l i c p r i c e} 2.50 % = \frac{$ 32 - N e t t o c o r p o r a t i o n}{$ 32} 2.50 % \times $ 32 = $ 32 - N e t t o c o r p o r a t i o n N e t t o c o r p o r a t i o n = $ 31.20 H e n c e, t h e T r u m p C o m p a n y s h o u l d r e c e i v e $ 31.20 .$

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Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	$8,500,000

Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	$8,500,000

Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Short Answer

Step by step solution

Computation of spread percentage

Computation of new spread

Computation of net amount

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