Which of the following are real assets, and which are financial (A+)

Which of the following are real assets, and which are financial?

a. A share of stock.

b. A personal IOU.

c. A trademark.

d. A truck. Real asset

e. Undeveloped land.

f. The balance in the firm’s checking account.

g. An experienced and hardworking sales force.

h. A bank loan agreement. Financial asset

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Guess Company reports $1,775,000 of net income for 2011 and declares $248,500 of cash dividends on its preferred stock for 2011 (A+)

Guess Company reports $1,775,000 of net income for 2011 and declares $248,500 of cash dividends on its preferred stock for 2011. At the end of 2011, the company had 330,000 weighted-average shares of common stock.

1. What amount of net income is available to common stockholders for 2011?

2. What is the company’s basic EPS for 2011

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Reliable Gearing currently is all-equity-financed (A+)

Reliable Gearing currently is all-equity-financed. It has 10,000 shares of equity outstanding, selling at $100 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $230,000 with the proceeds used to buy back stock. The high-debt plan would exchange $400,000 of debt for equity. The debt will pay an interest rate of 10.0%. The firm pays no taxes.

Required:

What will be the debt-to-equity ratio after each contemplated restructuring?

b-1. If earnings before interest and tax (EBIT) will be either $75,000 or $175,000, what will be earnings per share for each financing mix for both possible values of EBIT?

b-2. If both scenarios are equally likely, what is expected (i.e., average) EPS under each financing mix?

b-3. Is the high-debt mix preferable?

c. Suppose that EBIT is $100,000. What is EPS under each financing mix?

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The common stock and debt of Northern Sludge are valued at $64 million and $36 million, respectively (A+)

The common stock and debt of Northern Sludge are valued at $64 million and $36 million, respectively. Investors currently require a 16.6% return on the common stock and a 7.4% return on the debt. If Northern Sludge issues an additional $18 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes.

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Establishment Industries borrows $650 million at an interest rate of 8.4% (A+)

Establishment Industries borrows $650 million at an interest rate of 8.4%. It expects to maintain this debt level into the far future. What is the present value of interest tax shields? Establishment will pay tax at an effective rate of 34%.

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Pandora, Inc., makes a rights issue at a subscription price of $5 a share (A+)

Pandora, Inc., makes a rights issue at a subscription price of $5 a share. One new share can be purchased for every four shares held. Before the issue there were 10 million shares outstanding and the share price was $8.

Required:

a. What is the total amount of new money raised?

b. What is the expected stock price after the rights are issued?

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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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