You need to choose between the following types of issues (A+)

You need to choose between the following types of issues:

• A public issue of $10 million face value of 10-year debt. The interest rate on the debt would be 11.0%, and the debt would be issued at face value. The underwriting spread would be 1.9%, and other expenses would be $90,000.

• A private placement of $10 million face value of 10-year debt. The interest rate on the private placement would be 12%, but the total issuing expenses would be only $46,000.

Required:

a-1. Calculate the net proceeds of public issue

a-2. Calculate the net proceeds of private placement.

b. Other things equal, which is the better deal?

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The market value of the marketing research firm Fax Facts is $700 million (A+)

The market value of the marketing research firm Fax Facts is $700 million. The firm issues an additional $100 million of stock, but as a result the stock price falls by 2%. What is the cost of the price drop to existing shareholders as a fraction of the funds raised?

Required:

Cost of the price drop

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When Microsoft went public, the company sold 4 million new shares (the primary issue) (A+)

When Microsoft went public, the company sold 4 million new shares (the primary issue). In addition, existing shareholders sold .6 million shares (the secondary issue) and kept 21.3 million shares. The new shares were offered to the public at $21, and the underwriters received a spread of $1.51 a share. At the end of the first day’s trading the market price was $35 a share.

Required:

a. How much money did the company receive before paying its portion of the direct costs?

b. How much did the existing shareholders receive from the sale before paying their portion of the direct costs?

c. If the issue had been sold to the underwriters for $30 a share, how many shares would the company have needed to sell to raise the same amount of cash?

d. How much better off would the existing shareholders have been?

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Moonscape has just completed an initial public offering (A+)

Moonscape has just completed an initial public offering. The firm sold 3 million shares at an offer price of $10 per share. The underwriting spread was $.5 a share. The price of the stock closed at $15 per share at the end of the first day of trading. The firm incurred $300,000 in legal, administrative, and other costs. What were flotation costs as a fraction of funds raised?

Required:

Fraction of funds raised

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Having heard about IPO underpricing, I put in an order to my broker for 1,400 shares of every IPO he can get for me (A+)

Having heard about IPO underpricing, I put in an order to my broker for 1,400 shares of every IPO he can get for me. After 3 months, my investment record is as follows:

IPO Shares Allocatedto Me Price perShare Initial Return

A 600 $10 8%

B 300 20 13

C 1,400 7 −3

D 0 11 26

Required:

a. What is the average under pricing of this sample of IPOs?

b. Calculate the average initial return, weighting by the amount of money invested in each issue.

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Common Products has just made its first issue of stock (A+)

Common Products has just made its first issue of stock. It raised $2.5 million by selling 100,000 shares of stock to the public. These are the only shares outstanding. The par value of each share was $3. Complete the following table:

Answer:

Common shares (par value) (

Additional paid-in capital

Retained earnings

Net common equity

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Book value of common stockholders’ equity of Dow Chemical, December 31, 2010 (figures in billions) (A+)

Book value of common stockholders’ equity of Dow Chemical, December 31, 2010 (figures in billions).

Common shares ($2.4 par value per share) $2.950

Additional paid-in capital 2.305

Retained earnings 17.755

Treasury shares at cost (0.258 )

Other (4.894 )

Net common equity $17.858

Required:

a. Suppose that Dow Chemical issues 100 million shares at $20 share. Show the company’s equity after the issue. (Negative amounts should be indicated by a minus sign. Enter your answers in billions rounded to 3 decimal places.)

b. Suppose that Dow subsequently repurchased 50 million shares at $50 a share. Rework part (a) to show the effect of the further change. (Negative amounts should be indicated by a minus sign. Enter your answers in billions rounded to 3 decimal places.)

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The shareholders of the Pickwick Paper Company need to elect ten directors (A+)

The shareholders of the Pickwick Paper Company need to elect ten directors. There are 300,000 shares outstanding.

Required:

a. How many shares do you need to own to ensure that you can elect at least one director if the company has majority voting?

b. How many shares do you need to own to ensure that you can elect at least one director if the company has cumulative voting?

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If there are 10 directors to be elected and a shareholder owns 50 shares (A+)

If there are 10 directors to be elected and a shareholder owns 50 shares, calculate the maximum number of votes that he or she can cast for a favorite candidate under

Required:

a. Majority voting

b. Cumulative voting

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The authorized share capital of the Alfred Cake Company is 120,000 shares (A+)

The authorized share capital of the Alfred Cake Company is 120,000 shares. The equity is currently shown in the company’s books as follows:

Common stock ($1 par value) $65,000

Additional paid-in capital 15,000

Retained earnings 35,000

Common equity 115,000

Treasury stock (2,000 shares) 9,000

Net common equity $106,000

Required:

a. Suppose that the company issues 15,000 shares at $5 a share. Construct the revised equity accounts.

b. What would happen to the company’s books if instead it bought back 6,000 shares at $5 per share? Construct the revised equity accounts.

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