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Chapter 5: 7BP-a (page 451)
Question: Betsy Ross owns 927 shares in the Hanson Fabrics Company. There are 15 directors to be elected, and 33,500 shares are outstanding. The firm has adopted cumulative voting.
a. How many total votes can be cast?
Answer
The number of votes that can be cast is 502,500 shares.
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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.
d. In terms of the refunding decision, how should Barton be influenced if he thinks interest rates might go down even more?
In addition to U.S. corporations, what government groups compete for funds in the U.S. capital markets?
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.
Bonds of different risk classes will have a spread between their interest rates. Is this spread always the same? Why? (LO16-2)
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.
a. How many shares of stock must be sold to net $21,120,000? (Note: No out-of-pocket costs must be considered in this problem.)
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