QUESTION 7 "Consider the situation faced by the CFO of a company with a market capitalization of $700 Millions of USD, e.g. the firm has 100 million shares outstanding, so the shares are trading at $7 per share. The CFO needs to raise $500 Millions of USDs and announces a rights issue. Each existing shareholder is sent 5 right for every share he or she owns. The CFO has not decided how many rights will be required to purchase a share of new stock. At the current price per share, what is the maximum amount of rights the CFO can require stockholders for purchasing a share of new stock and so be able to raise the $500 Millions of USDs?"

QUESTION 7 "Consider the situation faced by the CFO of a company with a market capitalization of $700 Millions of USD, e.g. the firm has 100 million shares outstanding, so the shares are trading at $7 per share. The CFO needs to raise $500 Millions of USDs and announces a rights issue. Each existing shareholder is sent 5 right for every share he or she owns. The CFO has not decided how many rights will be required to purchase a share of new stock. At the current price per share, what is the maximum amount of rights the CFO can require stockholders for purchasing a share of new stock and so be able to raise the $500 Millions of USDs?"

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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QUESTION TWO A. What is a financial market? B. The directors of a company are planning to undertake a rights issue. Describe the factors that should be taken into account in deciding whether to have this issue underwritten instead. C. D Plc is in the process of making a 1 for 4 rights issue. The rights letters have just been sent to shareholders. The company currently has 20m K1 shares in issue and the current market price is K4.50 per share. The rights letter gives shareholders the right to buy their new shares for K3.50 each. D Plc plans to use the cash raised to build a major extension to its factory, thereby doubling production capacity. The finance director has received an angry letter from a shareholder. The shareholder complains that he cannot afford to invest in new shares. He contends that he is likely to suffer a loss because of the fact that the market will be flooded with cheap shares as the issue will almost certainly decrease the value of his holding. Required: I. II.…
PROBLEM 2 The Mark Company has $250,000 to pay dividends. The company has 25,000 shares of 8%, $50 par, preferred stock and 100,000 shares of $5 par common stock outstanding. The common stock is currently selling for $43 per share and the preferred stock is selling for $95 per share on the stock market. Required: Determine the amount of dividends to be paid for each class of stock in each of the independent situations. Preferred stock is nonparticipating and cumulative; dividends are in the arrears for 1 year at the beginning of the year. Preferred stock is fully participating and cumulative, no dividends in arrears. Preferred stock is nonparticipating and noncumulative, no dividends in arrears. Compute the dividend yield on the preferred stock and common stock for number 3.
Business Decision Problem Egghead, Inc., was a software chain that had over 100 stores across the U.S. Initially its founders and employees owned the company privately. The company eventu ally went public with an initial public offering (IPO) of 3.6 million shares (the company had 12 million shares prior to the IPO). The new shares were priced at $15 each. The company did not hold any treasury shares. Required a. Assume that the common shares had a $1 par value. Provide the journal entry to record the issuance of new shares. b. Discuss whether you think Egghead's board of directors and existing shareholders had to approve the public issuance before it occurred. Provide some reasons why Egghead wished to raise $54 million with equity rather than debt.
QUESTION 1 When a high P/E company pays a 40% premium to buy a low P/E company from a different industry, with the payment in stock. Which of the following is most likely to happen? Target stock price declines because the company will cease to exist. Acquirer stock price increases because acquier will have higher EPS. Target stock price increases because of the premium paid by the acquier. Target shareholder rejects the acquisition.
A company has just paid an ordinary share dividend of 32 cents and expected to pay a dividend of 33.6 cents in one year’s time. The company has a cost of equity of 13%. What is the market price of the company’s shares to the nearest cent on an ex dividend basis? $3.20 $4.41 $2.59 $4.20 Use the following information to answer questions 18 and 19 Bill plans to open a service centre. The equipment will cost $50,000. Bill expects the after-tax cash inflows to be $15,000 annually for 8 years, after which he plans to scrap the equipment and retire. What is the project’s regular payback period? 2.67 years 3.33 years 3.67 years 4.33 years Assume the required return is 10%. What is the project’s discounted payback period? 4.25 years 5.25 years 6 years the project does not payback on discounted basis.
9. The group company markets two shares for two different companies at a price of $50 per share, one of the two shares is undervalued by $5 and the other is overvalued by $1, but you have no way of knowing which of the two shares is overvalued and which of the two shares is undervalued the Actual. You plan to buy 2,000 shares of each issue. If the issue is priced below the actual price, it would make sense that only half of the required stock would be sold out. If you were able to buy 2,000 shares of each company what would your profit be? And what profit did you actually expect? What is the principle that you Explain it
Question #1 You currently own 600 shares of JKL, Inc. JKL is an all-equity firmthat has 75,000 shares of stock outstanding at a market price of $40a share. The company’s earnings before interest and taxes are $140,000.JKL has decided to issue $1 million of debt at 8 percent interest.This debt will be used to repurchase shares of stock. How many sharesof JKL stock must you sell to unlever your position if you can loanout funds at 8 percent interest? Question #2
Assume perfect markets. TMX Corporation has 4 million shares outstanding and a share price of $50 per share. TMX wants to repurchase 1 million shares. What would be the share price immediately after they repurchase the shares? $37.50 $50.00 $66.67
Question 9 options: Joffrey Corporation, a publicly traded company, is requiring an additional $5,000,000. The company has decided that a rights offering could raise the funds that are required. Currently there are 300,000 outstanding common shares and the market price of $55.00 per share. Each shareholder would receive 1 right for every share they own. The subscription price will be $50.00. This means that 100,000 new shares will be issued ($5,000,000/$50). Given this information, 300,000 old shares/100,000 new shares would mean 3 rights plus the subscription price will be required to get 1 new share. Sansa Stark is a shareholder and has 6,000 shares of Joffrey’s Corporation and $280,000 cash in her bank account. She is Queen of the North! What is the value of one right? Round to 2 decimal places. What is the value of Sansa’s portfolio before the rights issue? Round to the nearest dollar. If Sansa exercises her rights and participates in the rights…
QUESTION 3.2 Tusker Corporation is considering a 3- for- 2 share split. It currently has the shareholder’s equity position shown. The current share price is R120 per share. The most recent periods earnings available for ordinary shares are included in retained earnings. Preference shares R1 000 000Ordinary shares (100 000 shares at R3 R300 000per shareShare premium R1 700 000Retained earnings R10 000 000Total shareholders’ equity R13 000 000 What change in share price would you expect to result from the share split?
QUESTION 2 (a) Answer the following questions regarding Bean Bhd. (i) Bean Bhd has just announced an ordinary dividend per share of RM20. Thepast four years’ dividends per share have been RM13, RM14, RM17 andRM18 (most recent dividend) and shareholders require a return of 14%.Calculate Bean Bhd share price. (ii) Bean Bhd now decides to increase its debt level, thereby increasing thefinancial risk associated with its equity shares. Bean’s shareholdersconsequently increase their required rate of return to 15.4%. Calculate thenew price of Bean’s share.(iii) Discuss the impact of using the dividend growth model as a way of valuingshares.
Question 2 You have been appointed as a financial consultant by the directors of Baron Holdings. They require you to determine the cost of capital of the company. The following information is available on the capital structure of the company: ü 1 500 000 ordinary shares, with a market price of R3 per share. The latest dividend declared was 86 cents per share. A dividend growth of 15% was maintained for the past 5 years. ü 1 000 000 11%, R1 preference shares, with a market value of R3 per share. ü R1 000 000 9%, debentures due in 7 years and the current yield-to-maturity is 10%. Note that the current price of the debenture is R951 356 ü R700 000 14%, bank loan, due in December 2021. Additional information: - The company has a tax rate of 30%. - The beta of the company is 1.7, a risk free rate of 5% and the return on the market is 14%. Required: 2.1 Calculate the weighted average cost of capital. Use the Gordon Growth Model to calculate the cost of equity 2.2 Calculate the cost of…

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