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74.
Underwater Experimental is considering a project which requires the purchase of $498,000
of fixed assets. The net present value of the project is $22,500. Equity shares will be
issued as the sole means of financing the project. What will the new book value per share
be after the project is implemented given the following current information on the firm?
75.
Birds and More is considering a project which requires the purchase of $175,000 of fixed
assets. The net present value of the project is $4,500. Equity shares will be issued as the
sole means of financing this project. The price-earnings ratio of the project equals that of
the existing firm. What will the new market value per share be after the project is
implemented given the following current information on the firm?
76.
Wagner Trucking is considering investing in a new project that will cost $13 million and
increase net income by 6.5 percent. This project will be completely funded by issuing new
equity shares. Currently, the firm has 1.25 million shares of stock outstanding with a
market price of $42 per share. The current earnings per share are $1.82. What will the
earnings per share be if the project is implemented?
77.
You own 15 percent or 13,500 shares of Printers, Etc. These shares have a total market
value of $435,000. By what percentage will the total value of your investment in this firm
change if the company sells an additional 10,000 shares of stock at $30 a share and you
do not buy any?
78.
Kurt currently owns 3.4 percent of Northeastern Transportation. The company has a total
of 438,000 shares outstanding with a current market price of $26.20 a share. At present,
the firm is offering an additional 25,000 shares at a price of $25 a share. Kurt decides not
to participate in this offering. What will his ownership position be after the offering is
completed?
79.
The Timken Company has announced a rights offer to raise $25 million for a new journal,
the
Journal of Financial Excess
. This journal will review potential articles after the author
pays a nonrefundable reviewing fee of $2,500 per page. The stock currently sells for $48
per share, and there are 2.6 million shares outstanding. The subscription price is set at
$43 per share. What is the ex-rights price per share?
80.
The Warm Shoe Co. has concluded that additional equity financing will be needed to
expand operations and that the needed funds will be best obtained through a rights
offering. It has correctly determined that as a result of the rights offering, the share price
will fall from $100 to $90 ($100 is the rights-on-price; $90 is the ex-rights price, also
known as the
when-issued
price). The company is seeking $18 million in additional funds
with a per-share subscription price of $50. How many shares of stock are outstanding,
before the offering? (Assume that the increment to the market value of the equity equals
the gross proceeds of the offering.)
81.
The Woods Co. and the Mickelson Co. have both announced IPOs at $43 per share. One of
these is undervalued by $20, and the over is overvalued by $14, but you have no way of
knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is
underpriced, it will be rationed, and only half your order will be filled. What is the amount
of the difference between your expected profit and the amount of profit you could earn if
you
could
get 1,000 shares of Woods and 1,000 shares of Mickelson?
82.
Flagler, Inc. needs to raise $30 million to finance its expansion into new markets. The
company will sell new shares of equity via a general cash offering to raise the needed
funds. The offer price is $40 per share and the company's underwriters charge a 10
percent spread. How many shares need to be sold?
83.
The Educated Horses Corporation needs to raise $20 million to finance its expansion into
new markets. The company will sell new shares of equity via a general cash offering to
raise the needed funds. Suppose the offer price is $40 per share and the company's
underwriters charge an 8 percent spread. The SEC filing fee and associated administrative
expenses of the offering are $660,000. How many shares need to be sold?
84.
The Huff Co. has just gone public. Under a firm commitment agreement, Huff received
$21.50 for each of the 6 million shares sold. The initial offering price was $23.65 per share,
and the stock rose to $31.42 per share in the first few minutes of trading. Huff paid
$1,260,000 in direct legal and other costs, and $390,000 in indirect costs. The flotation
costs were what percentage of the funds raised?
85.
Mountain Homes wishes to expand its facilities. The company currently has 7 million
shares outstanding and no debt. The stock sells for $55 per share, but the book value per
share is $43. The firm's net income is currently $9.1 million. The new facility will cost $30
million, and it will increase net income by $309,000. Assume the firm issues new equity to
fund this expansion while maintaining a constant price-earnings ratio. What will be the
EPS be after the new equity issue?
86.
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations.
Some recent financial information for the company is shown here:
MHMM is considering an investment that has the same P/E ratio as the firm. The cost of
the investment is $800,000, and it will be financed with a new equity issue. What would
the ROE on the investment have to be if we wanted the price after the offering to be $115
per share? Assume the PE ratio remains constant.
87.
Precise Machining is considering a rights offer. The company has determined that the ex-
rights price would be $46. The current price is $53 per share, and there are 7 million
shares outstanding. The rights offer would raise a total of $70 million. What is the
subscription price?
88.
Atlas Corp. wants to raise $4 million via a rights offering. The company currently has
450,000 shares of common stock outstanding that sell for $40 per share. Its underwriter
has set a subscription price of $24 per share and will charge the company a 7 percent
spread. Assume that you currently own 7,200 shares of stock in the company and decide
not to participate in the rights offering. How much can you get for selling all of your
rights?
Essay Questions
89.
It can be argued that the decision to accept venture capital is one of the most critical
decisions an entrepreneur must make. Explain why.
90.
Explain both a rights offering and the basic characteristics of a right.
91.
Explain why there is a tendency for IPOs to be underpriced.
92.
Firms encounter several costs when issuing new securities. Identify and describe at least
four of these costs.
93.
Steve is the founder of Jefferson & Westover. Recently, the firm decided to issue an IPO
with Steve retaining 30 percent ownership of the firm. The IPO agreement contained both
a Green Shoe provision and a 6-month lockup agreement. Steve's cost basis per share is
$15. The offering price for the IPO was $16. On the first day of trading, the market price
per share rose to $28.20 and closed for the day at $25.60. Now, six months after the IPO
release, the stock is valued at $15.40 a share. Explain who benefited the most during the
lockup period, an outside investor or Steve, and why.
