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Chapter 5: Q9DQ (page 471)
Why is secondary trading in the security markets important?
Secondary trading facilitates investors with liquidity.
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Question: 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 |
g. List the remaining claims (unsatisfied secured and unsecured) and make an initial allocation and final allocation similar to that shown in Table 16A-4. Subordinated debenture holders may keep the balance after full payment is made to senior debt holders.
Discuss the benefits accruing to a company that is traded in the public securities markets.
The investment banking firm of Einstein & Co. will use a dividend valuation model to appraise the shares of the Modern Physics Corporation. Dividends (D1) at the end of the current year will be \(1.64. The growth rate (g) is 8 percent and the discount rate (Ke) is 13 percent.
a. What should be the price of the stock to the public?
b. If there is a 7 percent total underwriting spread on the stock, how much will the issuing corporation receive?
c. If the issuing corporation requires a net price of \)31.30 (proceeds to the corporation) and there is a 7 percent underwriting spread, what should be the price of the stock to the public? (Round to two places to the right of the decimal point.)
What is the difference between a bond agreement and a bond indenture? (LO16-1)
In addition to U.S. corporations, what government groups compete for funds in the U.S. capital markets?
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