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Chapter 5: 13DQ (page 471)
What act of Congress created the Securities and Exchange Commission?
The Securities Exchange Act of 1934.
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Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.
c. What are the earnings per share (EPS) and the price-earnings ratio before the issue (based on a stock price of $48)? What will be the price per share immediately after the sale of stock if the P/E stays constant?
Question: The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:
Bailey corporation | |
Income statement | |
For the year 20X1 | |
Sales (all on credit) | \(42,680,000 |
Cost of goods sold | \)32,240,000 |
Gross profit | \(10,440,000 |
Selling and administrative expenses | \)4,558,000 |
Operating profit | \(5,882,000 |
Interest expense | \)600,000 |
Net income before taxes | \(5,282,000 |
Taxes | \)2,120,000 |
Net income | \(3,162,000 |
Bailey corporation | |
Balance sheet | |
As of December 31, 20X1 | |
Assets | |
Current assets: | |
Cash | \)250,000 |
Marketable securities | \(130,000 |
Accounts receivables | \)6,000,000 |
Inventory | \(8,300,000 |
Total current assets | \)14,680,000 |
Net plant and equipment | \(13,970,000 |
Total assets | \)28,650,000 |
Liabilities and stockholders’ equity | |
Current liabilities: | |
Accounts payable | \(3,800,000 |
Notes payable | \)3,550,000 |
Total current liabilities | \(7,350,000 |
Long-term liabilities | \)5,620,000 |
Total liabilities | \(12,970,000 |
Stockholder’s equity: | |
Common stock (1,800,000 shares at \)1 par) | \(1,800,000 |
Capital in excess of par | \)6,300,000 |
Retained earnings | \(7,580,000 |
Total stockholder’s equity | \)15,680,000 |
Total liabilities and stockholder’s equity | \(28,650,000 |
b. Assuming an underwriting spread of 5 percent and out-of-pocket costs of \)300,000, what will net proceeds to the corporation be?
What is the purpose of market stabilization activities during the distribution process?
Explain how the bond refunding problem is similar to a capital budgeting decision. (LO16-3)
The Hardaway Corporation plans to lease a \(740,000 asset to the O’Neil Corporation. The lease will be for 11 years.
b. If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of \)740,000 and will pass the benefits along to the O’Neil Corporation in the form of lower lease payments, (related to the Hardaway Corporation in the form of lower initial net cost), how much should the revised lease payments be? The Hardaway Corporation desires a 13 percent return on the 11-year lease
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