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Chapter 5: Q2BP (page 527)
Preston Corporation has a bond outstanding with an \(80 annual interest payment, a market price of \)1,250, and a maturity date in 10 years. Assume the par value of the bonds is $1,000. Find the following:
a.The coupon rate.
b.The current rate.
c.The yield to maturity.
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Question: The management of Mitchell Labs decided to go private in 2002 by buying in all 2.80 million of its outstanding shares at \(24.80 per share. By 2006, management had restructured the company by selling off the petroleum research division for \)10.75 million, the fiber technology division for \(8.45 million, and the synthetic products division for \)20 million. Because these divisions had been only marginally profitable, Mitchell Labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of $1.10 this year. Investment bankers have contacted the firm and indicated that if it reentered the public market, the 2.80 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 15 times earnings per share.
b. What is the total value to the company from (1) the proceeds of the divisions that were sold, as well as (2) the current value of the 2.80 million shares (based on current earnings and an anticipated P/E of 15)?
Explain how the zero-coupon rate bond provides return to the investor. What are the advantages to the corporation? (LO16-2)
Tiger Golf Supplies has $25 million in earnings with 7 million shares outstanding. Its investment banker thinks the stock should trade at a P/E ratio of 31. Assume there is an underwriting spread of 7.8 percent. What should the price to the public be?
How would you define efficient security markets?
What are some specific features of bond agreements? (LO16-1)
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