QUESTIONS : CH 20 HW :
1. Which of the following statements about listing on a stock exchange is most CORRECT?
a. Listing is a decision of more significance to a firm than going public.
b. Any firm can be listed on the NYSE as long as it pays the listing fee.
c. Listing provides a company with some “free” advertising, and it may enhance the firm’s
prestige and help it do more business.
d. Listing reduces the reporting requirements for firms, because listed firms file reports with the
exchange rather than with the SEC.
e. The OTC is the second largest market for listed stock, and it is exceeded only by the NYSE.
2. Which of the following factors would increase the likelihood that a company would call i
ts outstanding bonds at this time?
a. The yield to maturity on the company’s outstanding bonds increases due to a weakening of the firm’s financial situation.
b. A provision in the bond indenture lowers the call price on specific dates, and yesterday was one of those dates.
c. The flotation costs associated with issuing new bonds rise.
d. The firm’s CFO believes that interest rates are likely to decline in the future.
e. The firm’s CFO believes that corporate tax rates are likely to be increased in the future.
3. Tuttle Buildings Inc. has decided to go public by selling $5,000,000 of new common stock. Its investment bankers agreed to take a smaller fee now (6% of gross proceeds versus their normal 10%) in exchange for a 1-year option to purchase an additional 200,000 shares at $5.00 per share. The investment bankers expect to exercise the option and purchase the 200,000 shares in exactly one year, when the stock price is forecasted to be $6.50 per share. However, there is a chance that the stock price will actually be $12.00 per share one year from now. If the $12 price occurs, what would the present value of the entire underwriting compensation be? Assume that the investment banker’s required return on such arrangements is 15%, and ignore taxes.
a. $1,235,925
b. $1,300,973
c. $1,369,446
d. $1,441,522
e. $1,517,391
4. Thompson Enterprises has $5,000,000 of bonds outstanding. Each bond has a maturity value of $1,000, an annual coupon of 12.0%, and 15 years left to maturity. The bonds can be called at any time with a premium of $50 per bond. If the bonds are called, the company must pay flotation costs of $10 per new refunding bond. Ignore tax considerations–assume that the firm’s tax rate is zero.
The company’s decision of whether to call the bonds depends critically on the current interest rate on newly issued bonds. What is the breakeven interest rate, the rate below which it would be profitable to call in the bonds?
a. 9.57%
b. 10.07%
c. 10.60%
d. 11.16%
e. 11.72%
5. Rainier Bros. has 12.0% semiannual coupon bonds outstanding that mature in 10 years. Each bond is now eligible to be called at a call price of $1,060. If the bonds are called, the company must replace them with new 10-year bonds. The flotation cost of issuing new bonds is estimated to be $45 per bond. How low would the yield to maturity on the new bonds have to be in order for it to be profitable to call the bonds today, i.e., what is the nominal annual “breakeven rate”?
a. 9.29%
b. 9.78%
c. 10.29%
d. 10.81%
e. 11.35%
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