The Sunbelt Corporation has $40 million of bonds outstanding that were issued at a coupon rate of$12^{7 / 8}$ percent seven years ago. Interest rates have fallen to 12 percent. Mr. Heath, the vice president of finance, does not expect rates to fall any further. The bonds have 18 years left to maturity, and Mr. Heath would like to refund the bonds with a new issue of equal amount also having 18 years to maturity. The Sunbelt Corporation has a tax rate of 36 percent. The underwriting cost on the old issue was 2.5 percent of the total bond value. The underwriting cost on the new issue will be 1.8 percent of the total bond value. The original bond indenture contained a five-year protection against a call, with an 8 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. Should the Sunbelt Corporation refund the old issue?

The Bowman Corporation has a $\$ 18$ million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to $8.5$ percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new $\$ 18,000,000$ issue is $\$ 530,000$, and the underwriting cost on the old issue was $\$ 380,000$. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded aftertax cost of debt) to analyze the refunding decision. Should the old issue be refunded with new debt?

The Bowman Corporation has a $\$ 18$ million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to $8.5$ percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new $\$ 18,000,000$ issue is $\$ 530,000$, and the underwriting cost on the old issue was $\$ 380,000$. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded aftertax cost of debt) to analyze the refunding decision. Calculate the net present value.

The management of Mitchell Labs decided to go private in 2002 by buying in all $2.80$ million of its outstanding shares at $\$ 24.80$ per share. By 2006 , management had restructured the company by selling off the petroleum research division for $\$ 10.75$ million, the fiber technology division for $\$ 8.45$ million, and the synthetic products division for $\$ 20$ million. Because these divisions had been only marginally profitable, Mitchell Labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of $\$ 1.10$ this year. Investment bankers have contacted the firm and indicated that if it reentered the public market, the $2.80$ million shares it purchased to go private could now be reissued to the public at a P/E ratio of 15 times earnings per share. What is the percentage return to the management of Mitchell Labs from the restructuring? Use answers from parts a and b to determine this value

When would you use an annuity factor in a net present value calculation instead of a present value factor for a single cash flow?

Floating-rate corporate bonds do not have which type of risk

The Presley Corporation is about to go public. It currently has aftertax earnings of $\$7,200,000$, and 2,100,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 800,000 new shares. The new shares will be priced to the public at $\$25$ per share, with a 5 percent spread on the offering price. There will also be $\$260,000$ in out-of-pocket costs to the corporation. Compute the net proceeds to the Presley Corporation.

Midland Corporation has a net income of $\$19$ million and 4 million shares outstanding. Its common stock is currently selling for $\$48$ per share. Midland plans to sell common stock to set up a major new production facility with a net cost of $\$21,120,000$. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for $\$44$ per share with a spread of 4 percent. How many shares of stock must be sold to net $\$21,120,000$? (Note: No out of-pocket costs must be considered in this problem.)

The management of Mitchell Labs decided to go private in 2002 by buying in all $2.80$ million of its outstanding shares at $\$ 24.80$ per share. By 2006 , management had restructured the company by selling off the petroleum research division for $\$ 10.75$ million, the fiber technology division for $\$ 8.45$ million, and the synthetic products division for $\$ 20$ million. Because these divisions had been only marginally profitable, Mitchell Labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of $\$ 1.10$ this year. Investment bankers have contacted the firm and indicated that if it reentered the public market, the $2.80$ million shares it purchased to go private could now be reissued to the public at a P/E ratio of 15 times earnings per share. What was the initial cost to Mitchell Labs to go private?

The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation is given below. Assume that 800,000 new corporate shares will be issued to the general public. What will earnings per share be immediately after the public offering? (Round to two places to the right of the decimal point.) Based on the price-earnings ratio of 12, what will the initial price of the stock be? Use earnings per share after the distribution in the calculation.

Tyson Iron Works is about to go public. It currently has aftertax earnings of $\$ 4,400,000$, and $4,200,000$ shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at $\$ 25$ per share with a 3 percent spread on the offering price. There will also be $\$ 280,000$ in out-of-pocket costs to the corporation. Compute the net proceeds to Tyson Iron Works.

I. B. Michaels has a chance to participate in a new public offering by Hi-Tech Micro Computers. His broker informs him that the demand for the 700,000 shares to be issued is very strong. His broker’s firm is assigned 25,000 shares in the distribution and will allow Michaels, a relatively good customer, 1.3 percent of its 25,000 share allocation. The initial offering price is $30 per share. There is a strong aftermarket, and the stock goes to$$32$ one week after issue. The first full month after issue, Mr. Michaels is pleased to observe his shares are selling for $\$33.50$. He is content to place his shares in a lockbox and eventually use their anticipated increased value to help send his son to college many years in the future. However, one year after the distribution, he looks up the shares in The Wall Street Journal and finds they are trading at $\$28.50$. Also compute this percentage gain or loss from the initial $\$30$ price

I. B. Michaels has a chance to participate in a new public offering by Hi-Tech Micro Computers. His broker informs him that the demand for the 700,000 shares to be issued is very strong. His broker’s firm is assigned 25,000 shares in the distribution and will allow Michaels, a relatively good customer, 1.3 percent of its 25,000 share allocation. The initial offering price is $30 per share. There is a strong aftermarket, and the stock goes to$$32$ one week after issue. The first full month after issue, Mr. Michaels is pleased to observe his shares are selling for $\$33.50$. He is content to place his shares in a lockbox and eventually use their anticipated increased value to help send his son to college many years in the future. However, one year after the distribution, he looks up the shares in The Wall Street Journal and finds they are trading at $\$28.50$. Why might a new public issue be expected to have a strong aftermarket?

Which of the following represents an event that is less routine when accounting for long-term assets?

A. recording an asset purchase

B. recording depreciation on an asset

C. recording accumulated depreciation for an asset or asset category

D. changing the estimated useful life of an asset