Solutions to Chapter 14
Introduction to Corporate Financing
1.
a. False. Because of efficient markets, it is difficult to find undervalued securities or issue
b. False. Competiti˜on is an important component in creating efficient markets. With
2. a.False. Equity issues in each year since 1994 have been negative; firms used some of their
b. True.
c. False. Debt ratios in the U.S increased until about 1990, but since then they have
3. By far the largest source of cash for most companies comes from internally generated
cash. The gap between this cash and the cash that companies need is called the financial
4.
a. The price at which each share is recorded in the company’s books – par value.
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5. a. Number of shares = par value of issued stock/par value per share
6. Common shares (par value) = 200,000 ï‚´ $2.00 = $400,000
7.
a. Par value of common shares will increase by:
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Table 14-1 becomes:
Common shares ($0.10 par value per share) 32.2
Additional paid-in capital 3,085.8
b. Treasury shares will increase by 2,000,000 ï‚´ $150 = $300 million.
Common shares ($0.10 par value per share) 32.0
Additional paid-in capital 2,786.0
8.
a. Under majority voting, the shareholder can cast a maximum of 100 votes for a favorite
b. Under cumulative voting with 10 candidates, the maximum number of votes a shareholder
9.
a If the company has majority voting, each candidate is voted on in a separate election.
a If the company has cumulative voting, all candidates are voted on at once, and the
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10.
a A company’s equity includes both common and preferred stock. True.
d. The sum of common equity and preferred stock is known as net worth. False.
11. In general, the fact that preferred stock has lower priority in the event of bankruptcy
reduces the price of the preferred stock and increases its yield compared to bonds. On the
12.
a. Haricot is all equity financed, so it will pay tax on the entire pretax profits of $100
(
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b. Haricot returns 65 million to its shareholders.
1
a Yes. The company has the option to buy back the notes. The redemption price is the
12.
a. A call provision gives the firm a valuable option. The call provision will require
the firm to compensate the investor by promising a higher yield to maturity.
b. The option to convert gives bondholders a valuable option. They will therefore be
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13. a.In the event of declining interest rates, non-callable bonds will rise more in price as
b. The coupon bond is more likely to be called, because for a zero-coupon bond to
c. The zero-coupon bond should offer a higher yield, as it is unlikely to be called back
14. The value of the non-convertible zero-coupon bond is:
$1,000
(1.08)10 =$463.19
, and the
15.
a Debt maturing in more than 1 year is often called funded debt.
m. An issue of bonds that is sold simultaneously in several countries is traditionally called
aEurobond.
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