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Chapter 5: 2DQ (page 471)
In which foreign industry has privatization been most important?
Telecommunication.
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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:
In \( millions | In \) millions | ||
Current assets | \(70 | Current liabilities | \)30 |
Fixed assets | \(70 | Long-term liabilities | \)30 |
Total liabilities | \(60 | ||
Stockholder’s equity | \)80 | ||
Total assets | \(140 | Total stockholder’s equity and liabilities | \)140 |
The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.
e. In an efficient capital market environment, should the consequences of SFAS No. 13, as viewed in the answers to parts c and d, change stock prices and credit ratings?
Becker Brothers is the managing underwriter for a 1.45-millon-share issue by Jay’s Hamburger Heaven. Becker Brothers is “handling” 10 percent of the issue. Its price is \(27 per share, and the price to the public is \)28.95.
Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 50,000 shares in the open market at an average price of \(27.50. It later sells the shares at an average value of \)27.20.
Compute Becker Brother’s overall gain or loss from managing the issue.
In what way is an investment banker a risk taker?
Under what circumstances would a call on a bond be exercised by a corporation? What is the purpose of a deferred call? (LO16-3)
Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers & Chance is attempting to price the issue. The car rental industry generally trades at a 20 percent discount below the P/E ratio on the Standard & Poor’s 500 Stock Index. Assume that index currently has a P/E ratio of 25. The firm can be compared to the car rental industry as follows:
Richmond | Car Rental Industry | |
Growth rate in earnings per share..... | 15% | 10% |
Consistency of performance............. | Increased earnings 4 out of 5 years | Increased earnings 3 out of 5 years |
Debt to total assets..................... | 52% | 39% |
Turnover of product......................... | Slightly below average | Average |
Quality of management.................. | High | Average |
Assume, in assessing the initial P/E ratio, the investment banker will first determine the appropriate industry P/E based on the Standard & Poor’s 500 Index. Then a half point will be added to the P/E ratio for each case in which Richmond Rent-A-Car is superior to the industry norm, and a half point will be deducted for an inferior comparison. On this basis, what should the initial P/E be for the firm?
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