ACCOUNTING

chapter 19: 2, 4, 6, and 10

2).

Stock Dividends The owners’ equity accounts for Hexagon International are shown here:

Common stock ($1 par value)                        $  30,000

Capital surplus                                               185,000

Retained earnings                               627,500

Total owners’ equity                                    $842,500

a.  If Hexagon stock currently sells for $37 per share and a 10 percent stock dividend is declared, how many new shares will be distributed? Show how the equity accounts would change.

b.  If Hexagon declared a 25 percent stock dividend, how would the accounts change?

4). Roll  Corporation (RC) currently has 330,000 shares of stock outstanding that sell for $64 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:

a.  RC has a five-for-three stock split?

b.  RC has a 15 percent stock dividend?

c.  RC has a 42.5 percent stock dividend?

d.  RC has a four-for-seven reverse stock split?

Determine the new number of shares outstanding in parts (a) through (d).

6). In the previous problem, suppose Levy has announced it is going to repurchase $22,800 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the repurchase? Ignoring tax effects, show how the share repurchase is effectively the same as a cash dividend.

The balance sheet for Levy Corp. is shown here in market value terms. There are 12,000 shares of stock outstanding.

Market  Value Balance Sheet

Cash                            $  55,000                                             Equity $465,000

Fixed assets                410,000

Total                          $465,000                                             Total  $465,000

The company has dec;ared a dividend of $1.90 per share. The stock goes ex dividend tomorrow. Ignoring any tax effects, what is the stock selling for today? What will it sell for tomorrow? What will the balance sheet look like after the dividends are paid?

10).

The Mann Company belongs to a risk class for which the appropriate discount rate is 10 percent. Mann currently has 220,000 outstanding shares selling at $110 each. The firm is contemplating the declaration of a $4 dividend at the end of the fiscal year that just began. Assume there are no taxes on dividends. Answer the following questions based on the Miller and Modigliani model, which is discussed in the text.

a.  What will be the price of the stock on the ex-dividend date if the dividend is declared?

b.  What will be the price of the stock at the end of the year if the dividend is not declared?

c.  If Mann makes $4.5 million of new investments at the beginning of the period, earns net income of $1.9 million, and pays the dividend at the end of the year, how many shares of new stock must the firm issue to meet its funding needs?

d.  Is it realistic to use the MM mode in the real world to value stock? Why or why not?

6). In the previous problem, if the SEC filing fee and associated administrative expenses of the offering are $1,900,000, how many shares need to be sold?

The St. Anger Corporation needs to raise $45 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. If the offer price is $31 per share and the company’s underwriters charge a spread of 7 percent, how many shares need to be sold?

12).  In the previous problem, what would the ROE on the investment have to be if we wanted the price after the offering to be $75 per share? (Assume the PE ratio remains constant.) What is the NPV of this investment? Does any dilution take place?

The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:

Stock price                  $75

Number of shares      $65,000

Total assets                $9,400,000

Total liabilities          $4,100,000

Net income                 $980,000

 

MHMM is considering an investment that has the same PE ratio as the firm. The cost of the investment is $1,500,000, and it will be financed with a new equity issue. The return on the investment will equal MHMM’s current ROE. What will happen to the book value per share, the market value per share, and the EPS? What is the NPV of this investment? Does dilution take place?

Chapter 20: 1, 5, and 8 (make your own excel sheet)

1). Again, Inc., is proposing a rights offering. Presently, there are 550,000 shares outstanding at $87 each. There will be 85,000 new shares offered at $81 each.

a.  What is the new market value of the company?

b.  How many rights are associated with one of the new shares?

c.  What is the ex-rights price?

d.  What is the value of a right?

e.  Why might a company have a rights offering rather than a general cash offer?

5).

The St. Anger Corporation needs to raise $45 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. If the offer price is $31 per share and the company’s underwriters charge a spread of 7 percent, how many shares need to be sold?

8).  Raggio, Inc., has 135,000 shares of stock outstanding. Each share is worth $75, so the company’s market value of equity is $10,125,000. Suppose the firm issues 30,000 new shares at the following prices: $75, $70, and $65. What will the effect be of each of these alternative offering prices on the existing price per share?

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