Finance

Chapter 17

18. 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 further. The bonds have 17 years left to maturity, and Mr. Brooks would like to refund the bonds with a new issue of equal amount also having 17 years to maturity. The Robinson Corporation has a tax rate of 30 percent.
533
The underwriting cost on the old issue was 2.4 percent of the total bond value. The underwriting cost on the new issue will be 1.7 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a 9 percent call premium starting in the sixth year and scheduled to decline by one-half percent each year thereafter. (Consider the bond to be seven years old for purposes of computing the premium.) Assume the discount rate is equal to the aftertax cost of new debt rounded up to the nearest whole number. a. Compute the discount rate.
b. Calculate the present value of total outflows.
c. Calculate the present value of total inflows.
d. Calculate the net present value.

Chapter 18

1. Moon and Sons Inc. earned $120 million last year and retained $72 million. What is the payout ratio?

14. 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:

Assets

Cash
$ 386,000

Accounts receivable
836,000

Fixed assets
1,048,000

Total assets
$2,270,000

Liabilities and Stockholders’ Equity

Accounts payable
$ 459,000

Long term payable
371,000

Common stock (295,000 shares at $1 par)
295,000

Retained earnings
1,145,000

Total liabilities and stockholders’ equity
$2,270,000

a. From a legal perspective, what is the maximum amount of dividends per share the firm could pay?

b. In terms of cash availability, what is the maximum amount of dividends per share the firm could pay?

c. Assume the firm earned an 18 percent return on stockholders’ equity last year. If the board wishes to pay out 50 percent of earnings in the form of dividends, how much will dividends per share be? (Round to two places to the right of the decimal point.)

21. 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 dividends, how much will dividends per share be?

c. If the $4 million is used to repurchase shares in the market at a price of $54 per share, how many shares will be acquired? (Round to the nearest share.)

d. What will the new earnings per share be? (Round to two places to the right of the decimal.)

e. If the P/E ratio remains constant, what will the price of the securities be? By how much, in terms of dollars, did the repurchase increase the stock price?

f. Has the stockholders’ total wealth changed as a result of the stock repurchase as opposed to receiving the cash dividend?

g. What are some reasons a corporation may wish to repurchase its own shares in the market?

Chapter 20

6. Assume the following financial data for the Noble Corporation and Barnes Enterprises:

Noble Corporation
Barnes Enterprises
Total earnings
$1,820,000
$5,620,000
Number of shares of stock outstanding
650,000
2,810,000
Earnings per share
$2.80
$2.00
Price-earnings ratio (P/E)
20×
28×
Market price per share .
$56
$56

a. If all the shares of the Noble Corporation are exchanged for those of Barnes Enterprises on a share-for-share basis, what will postmerger earnings per share be for Barnes Enterprises? Use an approach similar to that in Table 20-3.

b. Explain why the earnings per share of Barnes Enterprises changed.

c. Can we necessarily assume that Barnes Enterprises is better off after the merger?
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