*Bond Refunding*a) Skyline Acres Inn is considering the refunding of its present $40,000,000 issue of outstanding bonds. The bonds, which were issued 5 years ago, with a coupon rate of 11%, have a remaining term to maturity of 15 years but can be called at face value with a premium of 1 year’s interest. The floatation costs of the original issue were $600,000. These costs were amortized over five years. The bonds will be replaced with $40,000,000 of 8.5% coupon rate bonds, which will be issued at par. The floatation costs of these new bonds, which will mature in 15 years, are expected to be $775,000. To ensure that funds will be available when needed, there will be a one-month overlap, and net proceeds from the new issue will be invested at 5%. Skyline’s tax rate is 30%. Should the firm refund its existing debt? (20marks) *Capital Raising*a) Distinguish between best effort and firm commitment method of underwriting, highlighting when the underwriter will use each of the methods. b) Commato Ltd went public last year. Suppose that the underwriters acquired 70 million shares of Commato Ltd for $70 and sold them to the public at an offer price of $75. Assume Commato also paid $10 million in legal fees and other costs and that the shares ended the first day of trading at $89.00.i. What percent of the money raised was absorbed by direct expenses? ii. What are the net proceeds received? iii. What is the cost of underpricing? c) At its meeting on 25th May 2012, the Board of Directors of Guardian Holdings Limited, a publicly traded company listed on the Ghana Stock Exchange resolved to make a rights issue of one new share for every nineteen ordinary shares then held at a price of GH¢40 per share each to existing shareholders, in the proportion in which they held shares at the record date of the offer. The company offered to issue 10,000,000 new ordinary shares of the Company at the subscription price to raise money to repay short-term debt, thus reducing its leverage ratio to about 35%. The price of the shares at the time of the rights offering was GH¢45 and the ex-right date was fixed at August 9, 2012. The firm's tax rate is 30%. i. Estimate the value of one right, the number of shares currently outstanding and the theoretical price of the stock on August 9,2012. ii. Mr. Gyimah who owns 437 shares is concerned that the rights issue will lead to voting dilution and economic dilution of his investment in the company. Suggest two courses of action to Mr. Gyimah that will address his concerns and show that as long as he acts on your advice, the effects he is concerned about will not materialize.

Bond Refundinga) Skyline Acres Inn is considering the refunding of its present $40,000,000 issue of outstanding bonds. The bonds, which were issued 5 years ago, with a coupon rate of 11%, have a remaining term to maturity of 15 years but can be called at face value with a premium of 1 year’s interest. The floatation costs of the original issue were $600,000. These costs were amortized over five years. The bonds will be replaced with $40,000,000 of 8.5% coupon rate bonds, which will be issued at par. The floatation costs of these new bonds, which will mature in 15 years, are expected to be $775,000. To ensure that funds will be available when needed, there will be a one-month overlap, and net proceeds from the new issue will be invested at 5%. Skyline’s tax rate is 30%. Should the firm refund its existing debt? (20marks) Capital Raisinga) Distinguish between best effort and firm commitment method of underwriting, highlighting when the underwriter will use each of the methods. b) Commato Ltd went public last year. Suppose that the underwriters acquired 70 million shares of Commato Ltd for $70 and sold them to the public at an offer price of $75. Assume Commato also paid $10 million in legal fees and other costs and that the shares ended the first day of trading at $89.00.i. What percent of the money raised was absorbed by direct expenses? ii. What are the net proceeds received? iii. What is the cost of underpricing? c) At its meeting on 25th May 2012, the Board of Directors of Guardian Holdings Limited, a publicly traded company listed on the Ghana Stock Exchange resolved to make a rights issue of one new share for every nineteen ordinary shares then held at a price of GH¢40 per share each to existing shareholders, in the proportion in which they held shares at the record date of the offer. The company offered to issue 10,000,000 new ordinary shares of the Company at the subscription price to raise money to repay short-term debt, thus reducing its leverage ratio to about 35%. The price of the shares at the time of the rights offering was GH¢45 and the ex-right date was fixed at August 9, 2012. The firm's tax rate is 30%. i. Estimate the value of one right, the number of shares currently outstanding and the theoretical price of the stock on August 9,2012. ii. Mr. Gyimah who owns 437 shares is concerned that the rights issue will lead to voting dilution and economic dilution of his investment in the company. Suggest two courses of action to Mr. Gyimah that will address his concerns and show that as long as he acts on your advice, the effects he is concerned about will not materialize.

Principles of Accounting Volume 1

19th Edition

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax

Chapter13: Long-term Liabilities

Section: Chapter Questions

Problem 3EA: Krystian Inc. issued 10-year bonds with a face value of $100,000 and a stated rate of 4% when the...

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*Bond Refunding*
a) Skyline Acres Inn is considering the refunding of its present $40,000,000 issue of outstanding bonds. The bonds, which were issued 5 years ago, with a coupon rate of 11%, have a remaining term to maturity of 15 years but can be called at face value with a premium of 1 year’s interest. The floatation costs of the original issue were $600,000. These costs were amortized over five years. The bonds will be replaced with $40,000,000 of 8.5% coupon rate bonds, which will be issued at par. The floatation costs of these new bonds, which will mature in 15 years, are expected to be $775,000. To ensure that funds will be available when needed, there will be a one-month overlap, and net proceeds from the new issue will be invested at 5%. Skyline’s tax rate is 30%. Should the firm refund its existing debt? (20marks)

*Capital Raising*
a) Distinguish between best effort and firm commitment method of underwriting, highlighting when the underwriter will use each of the methods.

b) Commato Ltd went public last year. Suppose that the underwriters acquired 70 million shares of Commato Ltd for $70 and sold them to the public at an offer price of $75. Assume Commato also paid $10 million in legal fees and other costs and that the shares ended the first day of trading at $89.00.
i. What percent of the money raised was absorbed by direct expenses?
ii. What are the net proceeds received?
iii. What is the cost of underpricing?
c) At its meeting on 25th May 2012, the Board of Directors of Guardian Holdings Limited, a publicly traded company listed on the Ghana Stock Exchange resolved to make a rights issue of one new share for every nineteen ordinary shares then held at a price of GH¢40 per share each to existing shareholders, in the proportion in which they held shares at the record date of the offer. The company offered to issue 10,000,000 new ordinary shares of the Company at the subscription price to raise money to repay short-term debt, thus reducing its leverage ratio to about 35%. The price of the shares at the time of the rights offering was GH¢45 and the ex-right date was fixed at August 9, 2012. The firm's tax rate is 30%.

i. Estimate the value of one right, the number of shares currently outstanding and the theoretical price of the stock on August 9,2012.
ii. Mr. Gyimah who owns 437 shares is concerned that the rights issue will lead to voting dilution and economic dilution of his investment in the company. Suggest two courses of action to Mr. Gyimah that will address his concerns and show that as long as he acts on your advice, the effects he is concerned about will not materialize.

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