What could a financial manager look at to determine whether his company is successful or in distress? Give an example of a success or distress in today’s business world.
Reflect on your experience in this course. What are the key takeaways you have learned in this course that you can apply tomorrow or in the near future?
Profit or Loss on New Stock Issue
Security Brokers Inc. specializes in underwriting new issues by small firms. On a recent offering of Beedles Inc., the terms were as follows:
|Price to public:||$5 per share|
|Number of shares:||3 million|
|Proceeds to Beedles:||$14,000,000|
The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $380,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price?
a. $5 per share? Use minus sign to enter loss, if any. $b. $6.5 per share? Use minus sign to enter loss, if any. $c. $3.5 per share? Use minus sign to enter loss, if any. $Refunding AnalysisMullet Technologies is considering whether or not to refund a $125 million, 13% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $3 million of flotation costs on the 13% 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 8% would be required to retire the old bonds, and flotation costs on the new issue would amount to $4 million. Mullet’s marginal federal-plus-state tax rate is 40%. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 4% annually during the interim period.a. Conduct a complete bond refunding analysis. What is the bond refunding’s NPV? Do not round intermediate calculations. Round your answer to the nearest cent.$ b. What factors would influence Mullet’s decision to refund now rather than later?Problem 2 Merger BidHastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.40 (given its target capital structure). Vandell has $11.22 million in debt that trades at par and pays an 7.1% interest rate. Vandell’s free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5% a year. Both Vandell and Hastings pay a 40% combined federal and state tax rate. The risk-free rate of interest is 7% and the market risk premium is 4%.Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.67 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 5% rate. Hastings plans to assume Vandell’s $11.22 million in debt (which has an 7.1% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.6 million each year for Years 1, 2, and 3. After Year 3, a target capital structure of 30% debt will be maintained. Interest at Year 4 will be $1.441 million, after which the interest and the tax shield will grow at 5%.Indicate the range of possible prices that Hastings could bid for each share of Vandell common stock in an acquisition. Round your answers to the nearest cent. Do not round intermediate calculations.The bid for each share should range between $ per share and $ per share.Problem 3 LiquidationSouthwestern Wear Inc. has the following balance sheet:Current assets$1,875,000 Accounts payable$375,000Fixed assets1,875,000 Notes payable750,000 Subordinated debentures750,000 Total debt$1,875,000 Common equity1,875,000Total assets$3,750,000 Total liabilities and equity$3,750,000Problem 4The trustee’s costs total $246,500, and the firm has no accrued taxes or wages. Southwestern has no unfunded pension liabilities. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $3 million is received from sale of the assets?Distribution of proceeds on liquidation:1. Proceeds from sale of assets$2. First mortgage, paid from sale of assets$ 3. Fees and expenses of administration of bankruptcy$ 4. Wages due workers earned within 3 months prior to filing of bankruptcy petition$ 5. Taxes$ 6. Unfunded pension liabilities$ 7. Available to general creditors$Distribution to general creditors:Claims of General CreditorsClaim (1)Application of 100% Distribution (2)After Subordination Adjustment (3)Percentage of Original Claims Received (4)Notes payable$$$ %Accounts payable$$$ %Subordinated debentures$$$ %Total$$$ The remaining $ will go to the common stockholders.