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SIXTH QUIZ
FNCE 238/738
November 24, 2014
WRITE ALL ANSWERS ON THE TEST.
IF YOUR ANSWER CONTINUES ON THE BACK,
MAKE A NOTE OF IT ON THE FRONT.
45 PTS / 25 MINUTES
NAME:_____________________________________________
SECTION (12, 1:30 or 3):__________________________________
1.
(15 pts) An all-equity firm has existing assets and an investment opportunity that costs 20, and
everybody knows that the firm’s manager has private information about the value of each:
the
firm is either in state 1, where the assets are worth 30 and the investment opportunity pays off
24 (i.e. has an NPV of 4), or it is in state 2 where the assets are worth 10 and the investment
opportunity pays off 22 (i.e. has an NPV of 2).
The manager knows for sure which state the firm
is in, whereas everybody else puts a 50% probability on each state.
Assuming the project has to
be financed with an equity offering, would the manager finance it only if he privately knew the
firm was in state 2,
if investors believe that the manager will finance it only if he privately knows
the firm is in state 2?
Explain.
Investors believe the firm issues only in state 2 -> value the firm at 10+22 = 32.
So the firm must sell
20/32 of the firm to raise 20, leaving 12/32 of the firm for the old shareholders.
If the firm really is in
state 2, this fraction is worth (12/32)32=12 > 10, so it benefits old shareholders.
If the firm is actually in state 1, then the value for the old shareholders is (12/32)54=20.25 < 30.
So it
hurts old shareholders.
So if investors believe the firm issues only in state 2, then indeed the firm issues only in state 2.
2.
Last month, underwriters led by Jefferies took Dave & Buster’s public.
On 9/8 they’d announced
an initial price range of $16-18, and on 10/9 they priced it at $16.
On 10/10, the first day of
trading, it closed at $17.28, and here’s how it
traded over its first month:
a.
(5 pts) Setting aside for the moment what actually happened on 10/10, would you have
expected D&B to pop up substantially on its first day, given where it was priced?
Why
or why not?
It was priced within the initial price range, and historically this has associated with a modest increase on
average, not a big pop.
This is consistent with a dynamic where underwriters underreact to enthusiasm
from their investors, in order not to discourage enthusiasm, so that upward pricing predicts the big price
rises.
b.
(5 pts) Looking at what happened on 10/10 and subsequently, would you expect the
underwriter to exercise the overallotment option?
Explain.
The overallotment option allows the underwriter to prepare for aftermarket price support by overselling
in the first place, because this way he can buy back from the market only when the offering does poorly;
otherwise he covers the overselling by expanding the offering with the option.
Since this offering went
up and up, it stands to reason that the underwriter covered the overselling with the option, not by buying
back shares
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3.
(10 pts) From
Value Walk
, last Thursday (11/20/14) (slightly edited):
Western Union vulnerable to activism
The share price of The Western Union Company has seen several large swings since it was spun off
from First Data Corp. in 2006. Its $5 billion-plus buybacks have not had much of an impact on the stock
price.
Citing Susquehanna Financial Group LLP, a
Bloomberg report points out that Western Union’s
management or an activist could enhance shareholder value by shifting the buyback funds towards a
larger dividend. Alternatively, the firm could spin off or sell its non-core business-to-business division,
which could fetch at least $400 million based on similar transactions.
Joseph Stauff, a New York-
based analyst on Susquehanna’s event
-driven/special situations team,
believes the recently de-staggere
d board “suggests to us that the management team is vulnerable to
some level of activism”.
Focus on the last sentence.
How is the management team now vulnerable to activism?
Destaggering means the whole board, not just part of the board, is elected each year.
So the team is
now vulnerable because a hostile acquirer could take control of the whole board through a proxy battle,
and thereby potentially defeat any anti-takeover tactics, such as poison pills, the board put in place.
4.
News from Sweden, last Tuesday (11/18/14):
The Board of Directors of CDON Group has set the final terms for CDON Group's
rights issue that was resolved on 21 October 2014. Shareholders in CDON Group
have preferential rights to subscribe for 1 new share per 2 existing shares.
Every existing share in CDON Group entitles the holder to 1 subscription
right, and 2 subscription rights entitle to subscription for 1 new share. The
subscription price has been set at SEK 13 per new share.
…
Preliminary timetable
…
24 November 2014, First day of trading in the CDON Group share excluding
subscription rights
…
28 November - 10 December 2014, Trading in subscription rights
a.
(5 pts) On 11/17, the day before this announcement, CDON closed at SEK 20.
Given that
price and the terms above, at what discount to the theoretical ex-rights price is this offer
priced?
Using our formula, p
0
= 20, p
r
= 13, and x (# of new shares for each old share) = 0.5
TERP = 13 + (20-13)/1.5 = 17.667
b.
(5 pts) The timetable shows that the rights will trade separately from the shares, starting
later this week.
Given the information above, at what price would you expect a right to
trade?
Two rights allow the investor to buy for 13 a share worth 17.67, and thereby to make a profit of 17.667-
13=4.667.
So one right is worth half that, i.e. 2.33.
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Question 8
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Question 7 of 13
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Your first internship assignment is to prepare two schedules for Windsor Blue Co., a manufacturing company. You have a file that
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Manufacturing cost data for Orlando Company, which uses a job order cost system, are presented below.
Indicate the missing amount for each letter. Assume that in alltases manufacturing overhead is applied on the basis of direct labor
cost and the rate is the same. (Round overhead rate to 2 decimal places, eg. 15.25 and final answers to 0 decimal places, eg. 5,275.)
Case A
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- 5:42 AM Tue Nov 16 * 100% www-awu.aleks.coma Exam 2, 7.3-9.4 REVIEW Report Overall Assignment Score: 73% (Best Score) Ninotchka V Score. O O pont Submitteu. NOV Z 7.32 1 IVI Tme Spet. S s Español Incorrect Your answer is incorrect. Salma wants to save money to open a tutoring center. She buys an annuity with a monthly payment of $27 that pays 3.7% interest, compounded monthly. Payments will be made at the end of each month. Find the total value of the annuity in 10 years. Do not round any intermediate computations, and round your final answer to the nearest cent. If necessary, refer to the list of financial formulas. 圖 Answer Submitted: 00 $12345.92 Correct Answer: $3913.49 Assignments List EVEI IVIUIawll LLC. All Rights Reserved. Terms of Use Privacy Center Accessibility IIarrow_forward+V My Questions | bartleby b References Chapter 3 Quiz Camden County College camdenccinstructure.com/courses/3788/assignments/35967?module_item id=88693| Next> K Prev Send to Gradebook Submitted to Gradebook, Fri, Oct 4, 2019, 9:34:35 AM (America/New York -04:00) --/1 Question 15 View Policies Current Attempt in Progress Concord Industries has equivalent units of 7100 for materials and for conversion costs. Total manufacturing costs are $124370. Total materials costs are $91000. How much is the conversion cost per unit? O $17.52. O $4.70. $12.82. O $30.33 eTextbook and Media Submit Answer Save for Later Attempts: 0 of 1 used 11:10 A 10/4/20 hp ins prt sc end home f12 11 DI delete f9 f8 f7 f6 fs 10 + & % num backspace 6 7 lock 5 { P T U Y II 96arrow_forward#5 is the questionarrow_forward
- Eat min C e New tab Λ Content xW Quiz 3-MAT-143, section 03F, Fa X + Q A ✩ https://www.webassign.net/web/Student/Assignment-Responses/last?dep=34832472 Viewing Saved Work Revert to Last Response DETAILS MY NOTES You deposit $850 in an account paying an annual simple interest rate of 7.8%. Find the future value of the investment (in dollars) after 1 year. DETAILS MY NOTES Calculate the simple interest due (in dollars) on a 40-day loan of $1,600 if the annual interest rate is 9%. (Use 360 days in 1 year.) $ DETAILS MY NOTESarrow_forwardHey I was wondering if I can get help with this thank youarrow_forwardP7arrow_forward
- 24arrow_forwardMy Questions | bartleby b + Camden County College References Chapter 3 Quiz Ha X //camdenccinstructure.com/courses/3788/assignments/35967?module item id=88693 Next> Send to Gradebook < Prev Submitted to Gradebook, Fri, Oct 4, 2019, 9:34:35 AM (America/New York -04:00) Question 19 -/1 View Policies Current Attempt in Progress A process with no beginning work in process, completed and transferred out 85200 units during a period and had 50100 units in the ending work in process inventory that were 20% complete. The equivalent units of production for the period for conversion costs were: O 95220 equivalent units. O 135300 equivalent units. O 70200 equivalent units. O 85200 equivalent units. eTextbook and Media Attempts: 0 of 1 used Submit Answer Save for Later 11:21 AM 10/4/2019 hp ins prt sc 12 end 11 home f10 delete fg f8 f5 f4 II & num backspace 6 5 lock } { P T U Y home + 96arrow_forwardWeek 6: Quiz X CengageNOWv2 | Online teachin x + Irn/takeAssignment/takeAssignmentMain.do?invoker=&takeAssignmentSession Locator=&inprogress=false Rex and Dena are married and have two children, Michelle (age seven) and Nancy (age five). During 2021, Rex earned a salary of $26,500, received interest income of $300, and filed a joint income tax return with Dena. Dena had $0 gross income. Their earned income credit for the year is: Oa. $5,763. Ob. $0. Ⓒc. $5,980. Od. $5,700. All work saved. Previous Email Instructor Next Submit Tort for Cardi 0 8 Upcarrow_forward
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