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Chapter 5: Q6DQ (page 524)
What method of “bond repayment” reduces debt and increases the amount of common stock outstanding? (LO16-3)
The conversion method of bond repayment increases the common stock.
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The Presley Corporation is about to go public. It currently has after-tax earnings of \(7,200,000, and 2,100,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 800,000 new shares. The new shares will be priced to the public at \)25 per share, with a 5 percent spread on the offering price. There will also be $260,000 in out-of-pocket costs to the corporation.
d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public.
Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.
e. Determine what rate of return must be earned on the proceeds to the corporation so there will be a 10 percent increase in earnings per share during the year of going public.
What method of “bond repayment” reduces debt and increases the amount of common stock outstanding? (LO16-3)
American Health Systems currently has 6,400,000 shares of stock outstanding and will report earnings of \(10 million in the current year. The company is considering the issuance of 1,700,000 additional shares that will net \)30 per share to the corporation.
a. What is the immediate dilution potential for this new stock issue?
b. Assume that American Health Systems can earn 9 percent on the proceeds of the stock issue in time to include them in the current year’s results. Calculate earnings per share. Should the new issue be undertaken based on earnings per share?
The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders’ claims are also shown.
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 | \(8,500,000 |
c. Assuming the administrative costs of bankruptcy, workers’ allowable wages, and unpaid taxes add up to \)400,000, what is the total remaining asset value available to cover secured and unsecured claims?
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