Question: Katie Homes and Garden Co. has 10,

> The Clark Corporation desires to expand. It is considering a cash purchase of Kent Enterprises for $3 million. Kent has a $700,000 tax loss carryforward that could be used immediately by the Clark Corporation, which is paying taxes at the rate of 30 perc

> Sherwood Forest Products has a convertible bond quoted on the NYSE bond market at 90. (Bond quotes represent the percentage of par value. Thus 70 represents $700, 80 represents $800, and so on.) It matures in 10 years and carries a coupon rate of 5½ perc

> The bonds of Generic Labs Inc. have a conversion premium of $70. Their conversion price is $25. The common stock price is $22.50. What is the price of the convertible bond?

> The bonds of Goniff Bank & Trust have a conversion premium of $90. Their conversion price is $20. The common stock price is $16.50. What is the price of the convertible bonds?

> O’Reilly Moving Company has a $1,000 par value convertible bond outstanding that can be converted into 20 shares of common stock. The common stock is currently selling for $43.10 a share, and the convertible bond is selling for $900.00. a. What is the co

> The warrants of Dragon Pet Co. allow the holder to buy a share of stock at $26.20 and are selling for $14.10. The stock price is currently $23.50. To what price must the stock go for the warrant purchaser to at least be assured of breaking even?

> The warrants of Integra Life Sciences allow the holder to buy a share of stock at $11.75 and are selling for $2.85. The stock price is currently $8.50. To what price must the stock go for the warrant purchaser to at least be assured of breaking even?

> Manpower Electric Company has 6 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 20, the stock price $36, and the bonds mature in 16 years. a. What is the conversion value of the bond? b. Assume after one y

> Tulsa Drilling Company has $1.3 million in 12 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 40, the stock price is $36, and the bonds mature in 10 years. The bonds are currently selling at a conversion p

> What is shelf registration? How does it differ from the traditional requirements for security offerings?

> Myers Drugs Inc. has 1.20 million shares of stock outstanding. Earnings after taxes are $9 million. Myers also has warrants outstanding that allow the holder to buy 100,000 shares of stock at $15 per share. The stock is currently selling for $50 per shar

> Online Network Inc. has a net income of $650,000 in the current fiscal year. There are 100,000 shares of common stock outstanding, along with convertible bonds, which have a total face value of $1.6 million. The $1.6 million is represented by 1,600 diffe

> Quantum Inc. has warrants outstanding that allow the holder to purchase 1.5 shares of stock per warrant at $30 per share (exercise price). Thus, each individual share can be purchased at $30 with the warrant. The common stock is currently selling for $36

> Mr. John Hailey has $1,000 to invest in the market. He is considering the purchase of 50 shares of Comet Airlines at $20 per share. His broker suggests that he may wish to consider purchasing warrants instead. The warrants are selling for $10, and each w

> The Gifford Investment Company bought 90 Cable Corporation warrants one year ago and would like to exercise them today. The warrants were purchased at $25 each, and they expire when trading ends today. (Assume there is no speculative premium left.) Cable

> The Redford Investment Company bought 100 Cinema Corp. warrants one year ago and would like to exercise them today. The warrants were purchased at $24 each, and they expire when trading ends today (assume there is no speculative premium left). Cinema Cor

> Assume you can buy a warrant for $6 that gives you the option to buy one share of common stock at $14 per share. The stock is currently selling at $18 per share. a. What is the intrinsic value of the warrant? b. What is the speculative premium on the war

> Vernon Glass Company has $15 million in 10 percent convertible bonds outstanding. The conversion ratio is 40, the stock price is $17, and the bond matures in 10 years. The bonds are currently selling at a conversion premium of $45 over their conversion v

> Defense Systems Inc. has convertible bonds outstanding that are callable at $1,070. The bonds are convertible into 33 shares of common stock. The stock is currently selling for $39.25 per share. a. If the firm announces it is going to call the bonds at

> Standard Olive Company of California has a convertible bond outstanding with a coupon rate of 5 percent and a maturity date of 20 years. It is rated Aa, and competitive, nonconvertible bonds of the same risk class carry a 10 percent return. The conversio

> What is the purpose of market stabilization activities during the distribution process?

> The Olsen Mining Company has been very successful in the last five years. Its $1,000 par value convertible bonds have a conversion ratio of 32. The bonds have a quoted interest rate of 7 percent a year. The firm’s common stock is currently selling for $4

> Pittsburgh Steel Company has a convertible bond outstanding, trading in the marketplace at $960. The par value is $1,000, the coupon rate is 10 percent, and the bond matures in 20 years. The conversion price is $55 and the company’s common stock is selli

> Reynolds Technology has a convertible bond outstanding, trading in the marketplace at $835. The par value is $1,000, the coupon rate is 9 percent, and the bond matures in 25 years. The conversion ratio is 20, and the company’s common stock is selling for

> Preston Toy Co. has warrants outstanding that allow the holder to purchase a share of stock for $22 (exercise price). The common stock is currently selling for $28, while the warrant is selling for $9.25 per share. a. What is the intrinsic (minimum) valu

> In doing a five-year analysis of future dividends, the Dawson Corporation is considering the following two plans. The values represent dividends per share. a. How much in total dividends per share will be paid under each plan over five years? b. Mr. Br

> Squash Delight Inc. has the following balance sheet: The firm’s stock sells for $10 a share. a. Show the effect on the capital account(s) of a two-for-one stock split. b. Show the effect on the capital accounts of a 10 percent stock d

> A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II

> Planetary Travel Co. has $240,000,000 in stockholders’ equity. Eighty million dollars is listed as common stock and the balance is in retained earnings. The firm has $500,000,000 in total assets and 2 percent of this value is in cash. Earnings for the ye

> The following companies have different financial statistics. What dividend policies would you recommend for them? Explain your reasons.

> Polycom Systems earned $553 million last year and paid out 25 percent of earnings in dividends. a. By how much did the company’s retained earnings increase? b. With 100 million shares outstanding and a stock price of $101, what was the dividend yield?

> In what way is an investment banker a risk taker?

> The Hastings Sugar Corporation has the following pattern of net income each year, and associated capital expenditure projects. The firm can earn a higher return on the projects than the stockholders could earn if the funds were paid out in the form of di

> The Carlton Corporation has $5 million in earnings after taxes and 2 million shares outstanding. The stock trades at a P/E of 20. The firm has $4 million in excess cash. a. Compute the current price of the stock. b. If the $4 million is used to pay divid

> Worst Buy Company has had a lot of complaints from customers of late and its stock price is now only $2 per share. It is going to employ a one-for-five reverse stock split to increase the stock value. Assume Dean Smith owns 140 shares. a. How many shares

> Health Systems Inc. is considering a 15 percent stock dividend. The capital accounts are as follows: The company’s stock is selling for $32 per share. The company had total earnings of $19,200,000 with 6,000,000 shares outstanding and

> Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend. The capital accounts for the firm are as follows: The company’s stock is sel

> Wilson Pharmaceuticals’ stock has done very well in the market during the last three years. It has risen from $55 to $80 per share. The firm’s current statement of stockholders’ equity is as follows:

> Omni Telecom is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate. It will use the dividend valuation model originally presented in Chapter 10 for purposes of analysis. The model was sh

> The Vinson Corporation has earnings of $500,000 with 250,000 shares outstanding. Its P/E ratio is 20. The firm is holding $300,000 of funds to invest or pay out in dividends. If the funds are retained, the aftertax return on investment will be 15 percen

> Phillips Rock and Mud is trying to determine the maximum amount of cash dividends it can pay this year. Assume its balance sheet is as follows: a. From a legal perspective, what is the maximum amount of dividends per share the firm could pay? b. In te

> The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for $6 per share. The firm intends to first declare a 15 percent stock dividend and then pay a 25-cent cash dividend (which also causes a re

> Explain the role of financial intermediaries in the flow of funds through the three-sector economy.

> Midland Petroleum is holding a stockholders’ meeting next month. Ms. Ramsey is the president of the company and has the support of the existing board of directors. All 12 members of the board are up for reelection. Mr. Clark is a dissident stockholder. H

> The Beasley Corporation has been experiencing declining earnings, but has just announced a 50 percent salary increase for its top executives. A dissident group of stockholders wants to oust the existing board of directors. There are currently 14 director

> Betsy Ross owns 927 shares in the Hanson Fabrics Company. There are 15 directors to be elected. Thirty-three thousand five hundred shares are outstanding. The firm has adopted cumulative voting. a. How many total votes can be cast? b. How many votes does

> Carl Hubbell owns 6,001 shares of the Piston Corp. There are 12 seats on the company board of directors, and the company has a total of 78,000 shares of stock outstanding. The Piston Corp. utilizes cumulative voting. Can Mr. Hubbell elect himself to the

> Dr. Phil wishes to know how many shares are necessary to elect 6 directors out of 14 directors up for election for the board of the Winfrey Publishing Company. There are 340,000 shares outstanding

> Mr. Meyers wishes to know how many shares are necessary to elect 5 directors out of 14 directors up for election in the Austin Power Company. There are 150,000 shares outstanding.

> Barnes Air Conditioning Inc. has two classes of preferred stock: floating rate preferred stock and straight (normal) preferred stock. Both issues have a par value of $100. The floating-rate preferred stock pays an annual dividend yield of 4 percent, and

> The treasurer of Kelly Bottling Company (a corporation) currently has $150,000 invested in preferred stock yielding 8 percent. He appreciates the tax advantages of preferred stock and is considering buying $150,000 more with borrowed funds. The cost of t

> Enterprise Storage Company has $440,000 shares of cumulative preferred stock outstanding, which has a stated dividend of $7.75. It is six years in arrears in its dividend payments. a. How much in total dollars is the company behind in its payments? b. Th

> The efficient market hypothesis is interpreted in a weak form, a semi strong form, and a strong form. How can we differentiate its various forms?

> What are the four types of out-of-court settlements? Briefly describe each.

> National Health Corporation (NHC) has a cumulative preferred stock issue outstanding, which has a stated annual dividend of $8 per share. The company has been losing money and has not paid preferred dividends for the last five years. There are 350,000 sh

> The Omega Corporation has some excess cash it would like to invest in marketable securities for a long-term hold. Its vice president of finance is considering three investments (Omega Corporation is in a 35 percent tax bracket and the tax rate on divide

> Walker Machine Tools has 5.5 million shares of common stock outstanding. The current market price of Walker common stock is $52 per share rights-on. The company’s net income this year is $17.5 million. A rights offering has been announced in which 550,00

> Mr. and Mrs. Anderson own two shares of Magic Tricks Corporation’s common stock. The market value of the stock is $58. The Andersons also have $46 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $46

> Todd Winningham IV has $4,800 to invest. He has been looking at Gallagher Tennis Clubs Inc. common stock. Gallagher has issued a rights offering to its common stockholders. Six rights plus $48 cash will buy one new share. Gallagher’s stock is selling for

> Computer Graphics has announced a rights offering for its shareholders. Carol Stevens owns 1,400 shares of Computer Graphics stock. Four rights plus $54 cash are needed to buy one of the new shares. The stock is currently selling for $66 rights-on. a. Wh

> Boles Bottling Co. has issued rights to its shareholders. The subscription price is $45 and four rights are needed along with the subscription price to buy one of the new shares. The stock is selling for $55 rights-on. a. What would be the value of one r

> Rust Pipe Co. was established in 1994. Four years later, the company went public. At that time, Robert Rust, the original owner, decided to establish two classes of stock. The first represents Class A founders’ stock and is entitled to nine votes per sha

> Mr. Michaels controls proxies for 40,000 of the 75,000 outstanding shares of Northern Airlines. Mr. Baker heads a dissident group that controls the remaining 35,000 shares. There are seven board members to be elected and cumulative voting rules apply. Mi

> Folic Acid Inc. has $20 million in earnings, pays $2.75 million in interest to bondholders, and $1.80 million in dividends to preferred stockholders. a. What are the common stockholders’ residual claims to earnings? b. What are the common stockholders’ l

> What is the purpose of using simulation analysis?

> The yield to maturity for 10-year bonds is as follows for four different bond rating categories: The bonds of Falter Corporation were rated as Aaa and issued at par a few weeks ago. The bonds have just been downgraded to Aa2. Determine the new price of

> Cox Media Corporation pays an 11 percent coupon rate on debentures that are due in 10 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,110. The theoretical value of the bonds will be equal

> The Florida Investment Fund buys 58 bonds of the Gator Corporation through a broker. The bonds pay 10 percent annual interest. The yield to maturity (market rate of interest) is 12 percent. The bonds have a 10-year maturity. Using an assumption of semian

> Match the yield to maturity in column 2 with the security provisions (or lack thereof) in column 1. Higher returns tend to go with greater risk.

> An investor must choose between two bonds: Bond A pays $72 annual interest and has a market value of $925. It has 10 years to maturity. Bond B pays $62 annual interest and has a market value of $910. It has two years to maturity. Assume the par value of

> Harold Reese must choose between two bonds: Bond X pays $95 annual interest and has a market value of $900. It has 10 years to maturity. Bond Z pays $95 annual interest and has a market value of $920. It has two years to maturity. a. Compute the current

> The Harris Company is the lessee on a 4-year lease with the following payments at the end of each year: Year 1: $10,000 Year 2: $15,000 Year 3: $20,000 Year 4: $25,000 An appropriate discount rate is 7%, yielding a present value of $48,055. a) If the lea

> Krawczek Company will enter into a lease agreement with Heavy Equipment Co. where Krawczek will make lease payments over the next 5 years. The lease is non cancelable and requires equal annual payments of $20,000 per year beginning on January 1 of the fi

> Preston Corporation has a bond outstanding with an $80 annual interest payment, a market price of $1,250, and a maturity date in 10 years. Assume the par value of the bonds is $1,000. Find the following: a. The coupon rate. b. The current rate. c. The yi

> The Sunbelt Corporation has $40 million of bonds outstanding that were issued at a coupon rate of 12⅞ percent seven years ago. Interest rates have fallen to 12 percent. Mr. Heath, the vice president of finance, does not expect rates to fall any further.

> Explain the effect of the risk-return trade-off on the market value of common stock.

> The Robinson Corporation has $43 million of bonds outstanding that were issued at a coupon rate of 11¾ percent seven years ago. Interest rates have fallen to 10¾ percent. Mr. Brooks, the vice president of finance, does not expect rates to fall any furthe

> The Bowman Corporation has a $18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally is

> A $1,000 par value bond was issued 20 years ago at a 9 percent coupon rate. It currently has five years remaining to maturity. Interest rates on similar debt obligations are now 10 percent. a. Compute the current price of the bond using an assumption of

> A $1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It currently has 15 years remaining to maturity. Interest rates on similar obligations are now 8 percent. a. What is the current price of the bond? (Look up the answer in Table

> Seventeen years ago, the Archer Corporation borrowed $6,500,000. Since then, cumulative inflation has been 65 percent (a compound rate of approximately 3 percent per year). a. When the firm repays the original $6,500,000 loan this year, what will be the

> Assume a zero-coupon bond that sells for $403 and will mature in 10 years at $1,250. What is the effective yield to maturity? (Compute PVIF and go to Appendix B for the 10-year figure to find the answer, or compute FVIF and go to Appendix A for the 10-ye

> A 17-year, $1,000 par value zero-coupon rate bond is to be issued to yield 7 percent. a. What should be the initial price of the bond? (Take the present value of $1,000 for 17 years at 7 percent, using Appendix B.) b. If immediately upon issue, interest

> A previously issued A2, 15-year industrial bond provides a return three-fourths higher than the prime interest rate of 11 percent. Previously issued A2 public utility bonds provide a yield of three-fourths of a percentage point higher than previously iss

> The Pioneer Petroleum Corporation has a bond outstanding with an $85 annual interest payment, a market price of $800, and a maturity date in five years. Find the following: a. The coupon rate. b. The current rate. c. The yield to maturity.

> Walton and Company is the managing investment banker for a major new underwriting. The price of the stock to the investment banker is $23 per share. Other syndicate members may buy the stock for $24.25. The price to the selected dealers group is $24.80,

> Assume a firm has several hundred possible investments and that it wants to analyze the risk-return trade-off for portfolios of 20 projects. How should it proceed with the evaluation?

> Assume Sybase Software is thinking about three different size offerings for issuance of additional shares. What is the percentage underwriting spread for each size offer?

> Jordan Broadcasting Company is going public at $50 net per share to the company. There also are founding stockholders that are selling part of their shares at the same price. Prior to the offering, the firm had $26 million in earnings divided over 11 mil

> American Health Systems has 6,400,000 shares of stock outstanding and will report earnings of $10 million in the current year. The company is considering the issuance of 1,700,000 additional shares, which can only be issued at $18 per share. a. Assume th

> American Health Systems currently has 6,400,000 shares of stock outstanding and will report earnings of $10 million in the current year. The company is considering the issuance of 1,700,000 additional shares that will net $30 per share to the corporation

> The management of Mitchell Labs decided to go private in 2002 by buying all 2.80 million of its outstanding shares at $24.80 per share. By 2006, management had restructured the company by selling off the petroleum research division for $10.75 million, th

> I. B. Michaels has a chance to participate in a new public offering by Hi-Tech Micro Computers. His broker informs him that demand for the 700,000 shares to be issued is very strong. His broker’s firm is assigned 25,000 shares in the distribution and wil

> Tyson Iron Works is about to go public. It currently has after tax earnings of $4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at

> The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of $6,910,000 in the current year. The company is considering the issuance of 1 million additional shares that can only be issued at $30 per share. a. Ass

> The Presley Corporation is about to go public. It currently has aftertax earnings of $7,200,000, and 2,100,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 800,000 new shares. The new shares will

> Midland Corporation has a net income of $19 million and 4 million shares outstanding. Its common stock is currently selling for $48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of $21,120,000. Th

> If risk is to be analyzed in a qualitative way, place the following investment decisions in order from the lowest risk to the highest risk: a. New equipment b. New market c. Repair of old machinery d. New product in a foreign market e. New product in a r

> The Landers Corporation needs to raise $1.60 million of debt on a 20-year issue. If it places the bonds privately, the interest rate will be 10 percent. Twenty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rat

> The investment banking firm of Einstein & Co. will use a dividend valuation model to appraise the shares of the Modern Physics Corporation. Dividends (D1) at the end of the current year will be $1.64. The growth rate (g) is 8 percent and the discount rat