Reference no: EM131157598

Part -1:

Question 1.

The authorized share capital of the Alfred Cake Company is 100,000 shares. The equity is currently shown in the company's books as follows:

Common stock ($2 par value)	$ 70,000
Additional paid­in capital	20,000
Retained earnings	40,000
Common equity	$130,000
Treasury stock (5,000 shares)	14,000
Net common equity	$116,000

a. How many shares are issued?

Number of shares issued

b. How many shares are outstanding?

Outstanding shares

c. How many more shares can be issued without the approval of shareholders?

Common Products has just made its first issue of stock. It raised $2.2 million by selling 150,000 shares of stock to the public. These are the only shares outstanding. The par value of each share was $2. Complete the following table:

3. Common Products has just made its first issue of stock. It raised $2.2 million by selling 150,000 shares of stock to the public. These are the only shares outstanding. The par value of each share was $2. Complete the following table:

4. The shareholders of the Pickwick Paper Company need to elect five directors. There are 360,000 shares outstanding.

a. What is the minimum number of shares you need to own to ensure that you can elect at least one director if the company has majority voting?

Number of shares

b. What is the minimum number of shares you need to own to ensure that you can elect at least one director if the company has cumulative voting? (Round your answer to the nearest whole number.)

Part -2:

1. 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 $.70 a share. The price of the stock closed at $16 per share at the end of the first day of trading. The firm incurred $400,000 in legal, administrative, and other costs.

What were flotation costs as a fraction of funds raised? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Costs as percent of funds raised

2. Young Corporation stock currently sells for $40 per share. There are 1 million shares currently outstanding. The company announces plans to raise $5 million by offering shares to the public at a price of $40 per share.

a. If the underwriting spread is 6%, how many shares will the company need to issue in order to be left with net proceeds of $5 million? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

b. If other administrative costs are $60,000, what is the dollar value of the total direct costs of the issue?

c. If the share price falls by 5% at the announcement of the plans to proceed with a seasoned offering, what is the dollar cost of the announcement effect?

3. Associated Breweries is planning to market unleaded beer. To finance the venture, it proposes to make a rights issue with a subscription price of $10. One new share can be purchased for every three shares held. The company currently has outstanding 210,000 shares priced at $50 a share. Assuming that the new money is invested to earn a fair return, give values for the following:

a. Number of new shares.

Number of new shares

b. Amount of new investment.

New investment $

c. Total value of company after issue.

Value of company $

d. Total number of shares after issue.

Total number of shares

e. Share price after the issue.

Part -3:

1. River Cruises is all­equity­financed.

Current data

Number of shares	100,000
Price per share	$              10
Market value of shares	$1,000,000 State of the Economy
	Slump	Normal	Boom
Profits before interest	$      79,000	133,000	194,500

Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data.

2. River Cruises is all­equity­financed with 100,000 shares. It now proposes to issue $340,000 of debt at an interest rate of 12% and use the proceeds to repurchase 34,000 shares at $10 per share. Profits before interest are expected to be $134,000.

a. What is the ratio of price to expected earnings for River Cruises before it borrows the $340,000?

b. What is the ratio after it borrows?

3. The common stock and debt of Northern Sludge are valued at $64 million and $36 million, respectively. Investors currently require a return of 16.6% on the common stock and 7.4% 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.

4. Here is Establishment Industries' market­value balance sheet (Figures in millions):

Net working capital	$   640	Debt	$   950
Long­term assets	2,360	Equity	2,050
Value of firm	$ 3,000		$ 3,000

The debt is yielding 6.7%, and the cost of equity is 14.3%. The tax rate is 29%. Investors expect this level of debt to be permanent.

a. What is Establishment's WACC?
b. How would the market­value balance sheet change if Establishment retired all its debt?