Fluent Essays

Please show work step by step.Chapter 19, problems 19-1, 19-2, 19-3 (a,b), 19-4 (a,b)Warrants:19-1. Gregg Company recently issued two types of bonds. The first issue consisted of 20 year straight debt with an 8\% coupon paid annually. The second issue consisted of 20 year bonds with a 6\% coupon paid annually and attached warrants. Both issues sold at their $1,000 par values. What is the implied value of the warrants attached to each bond?Convertibles:19-2. Peterson Securities recently issued convertible bonds with a $1,000 par value. The bonds have a conversion price of $40 a share. What is the convertible issue’s conversion ratio?Warrants:19-3. Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $25.• Calculate the exercise value of the firm’s warrants if the common sells at each of the following prices: (1) $20, (2) $25, (3) $30, (4) $100. ((Hint: A warrant’s exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.)• Assume the firm’s stock now sells for $20 per share. The company wants to sell some 20 year, $1,000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm’s straight bonds yield 12\%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate, and dollar coupon, must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bonds should have an initial price of $1,000.)Convertible Premiums:19-4. The Tsetsekos Company was planning to finance an expansion. The principal executives of the company all agreed that an industrial company such as theirs should finance growth by means of common stock rather than by debt. However, they felt that the current $42 per share price of the company’s common stock did not reflect its true worth, so they decided to sell a convertible security. They considered a convertible debenture but feared the burden of fixed interest charges if the common stock did not rise enough in price to make conversion attractive. They decided on an issue of the convertible preferred stock, which would pay a dividend of $2.10 per share.• The conversion ratio will be 1.0; that is, each share of convertible preferred can be converted into a single share of common. Therefore, the convertible’s par value (and also the issue price) will be equal to the conversion price, which in turn will be determined as a premium (i.e., the percentage by which the conversion price exceeds the stock price) over the current market price of the common stock. What will the conversion price be if it is set at a 10\% premium? At a 30\% premium?• Should the preferred stock include a call provision? Why?Chapter 20, problems 20-2, 20-3 (a,b,c), 20-5 (a,b)Underwriting and Flotation Expenses:20-2. The Beranek Company, whose stock price is now $25, needs to raise $20 million in common stock. Underwriters have informed the firm’s management that they must price the new issue to the public at $22 per share because of signaling effects. The underwiters’ compensation will be 5\% of the issue price, so Beranek will net $20.90 per share. The firm will also incur expenses in the amount of $150,000. How many shares must the firm sell to net $20 million after underwriting and flotation expenses?New Stock Issue:20-3. The Edelman Gem Company, a small jewelry manufacturer, has been successful and has enjoyed a good growth trend. Now Edelman is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price for the stock. The company and its investment banks believe that the proper procedure is to select similar firms with publicly traded common stock and to make relevant comparisons.Several jewelry manufacturers are reasonably similar to Edelman with respect to product mix, asset composition, and debt/equity proportions. Of these companies, Kennedy Jewelers and Strasburg Fashions are most similar. When analyzing the following data, assume that 2005 and 2010 were reasonably “normal” years for all three companies- that is, these years were neither especially good nor especially bad in terms of sales, earnings, and dividends. At the time of the analysis, rRF was 8\% and RPM was 4\%. Kennedy is listed on the AMEX and Strasburg on the NYSE, while Edelman will be traded in the Nasdaq market.KennedyStrasburgEdelman (Totals)Earnings per share*2010$4.50$7.50$1,200,00020053.005.5816,000Price per share*2010$36.00$65.00-Dividends per share*2010$2.25$3.75$600,00020051.502.75420,000Book value per share, 2010*$30.00$55.00$9 millionMarket/book ratio, 2010120\%118\%-Total assets, 2010$28 million$82 million$20 millionTotal debt, 2010$12 million$30 million$11 millionSales, 2010$41 million$140 million$37 million*The data are on a per share basis for Kennedy and Strasburg but totals for Edelman.• Assume that Edelman has 100 shares of stock outstanding. Use this information to calculate earnings per share (EPS), dividends per share (DPS), and book value per share for Edelman. (Hint: Edelman’s 2010 EPS=$12,000.)• Calculate earnings and dividend growth rates for the three companies. (Hint: Edelman’s EPS growth rate is 8\%.)• On the basis of your answer to part a, do you think Edelman’s stock would sell at a price in the same “ballpark” as that of Kennedy and Strasburg- that is, in the range of $25 to $100 per share?Refunding Analysis:20-5. Mullet Technologies is considering whether or not to refund a $75 million, 12\% coupon, 30 year bond issue that was sold 5 years ago. It is amortizing $5 million of flotation costs on the 12\% bonds over the issue’s 30 year life. Mullet’s investment banks have indicated that the company could sell a new 25 year issue at an interest rate of 10\% in today’s market. Neither they nor Mullet’s management anticipate that interest rates will fall below 10\% any time soon, but there is a chance that rates will increase.A call premium of 12\% would be required to retire the old bonds, and flotation costs on the new issue would amount to $5 million. Mullet’s marginal federal plus state tax rate is 40\%. The new bonds would be issued 1 month before the old bonds called, with the proceeds being invested in short-term government securities returning 6\% annually during the interim period.• Perform a complete bond refunding analysis. What is the bond refunding’s NVP?• What factors would influence Mullet decision to refund now rather than later?