UIUC FIN 321 - Assignment 3 (4 pages)

Previewing page 1 of 4 page document View the full content.
View Full Document

Assignment 3



Previewing page 1 of actual document.

View the full content.
View Full Document
View Full Document

Assignment 3

121 views


Pages:
4
School:
University of Illinois at Urbana, Champaign
Course:
Fin 321 - Advanced Corporate Finance
Unformatted text preview:

UNIVERSITY OF ILLINOIS AT URBANA CHAMPAIGN College of Business D E PAR T M E N T O F F I NAN C E Finance 321 Advanced Corporate Finance Spring 2007 Assignment 3 20 points Lectures 12 17 Due April 12 2007 Each question is worth 2 points 1 A company is using a uniform price Dutch auction system to sell 2 million shares of common stock in an IPO Assume that it received the following bids Investor 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 2 Bid Price 125 123 121 119 117 115 113 111 109 107 105 103 101 99 97 95 93 91 89 87 85 83 81 79 Shares 100 000 200 000 250 000 150 000 100 000 200 000 100 000 150 000 350 000 100 000 400 000 100 000 200 000 150 000 150 000 200 000 250 000 150 000 250 000 150 000 250 000 300 000 100 000 150 000 A What would the offering price be on this IPO B How many shares would investor 13 receive A company is issuing an IPO with an offering price of 25 a share The spread is 7 This offering consists of a primary offering of 2 5 million shares and a secondary offering of 2 million shares Calculate the proceeds to the company 3 A firm is trying to choose between making a public offering of debt or a private placement In each case the issue involves 25 million face value of 20 year debt and the debt would be issued at face value The choices are Public issue The interest rate would be 7 5 with an underwriting spread of 1 25 and other expenses of 75 000 Private placement The interest rate would be 7 75 with expenses of 25 000 4 A What would the proceeds be from the public issue net of expenses What would the proceeds be from the private placement net of expenses B Which is the better deal Why Use the following information for this question Earnings per share for 2007 8 00 Number of shares outstanding30 million Target payout ratio 40 Planned dividend per share 4 80 Stock price 12 31 07 85 50 The dividend will be paid in early January 2008 Assume that there are no corporate or personal income taxes 5 6 A What will the price of the company s stock be after the dividend is paid B Suppose the company cancels the dividend and announces that it will use the money saved to repurchase shares What happens to the stock price when this is announced Assume this announcement does not provide any information about the company s prospects How many shares will the company need to repurchase The shares of Ace and Zed each sell for 100 and offer a pretax return of 10 The return on Ace is entirely in the form of a dividend 10 per share The return on Zed the return comes entirely as a capital gain the shares appreciate by 10 a year Assume both dividends and capital gains are taxed at 15 A What is the after tax return on Ace B What is the after tax return on Zed for an investor who sells the stock after 10 years Briefly explain the information content of a share repurchase 7 8 9 10 Assume Macbeth Spot Remover the company used as an example in chapter 17 were to issue 3 000 of debt at a 10 interest rate and use the proceeds to repurchase 300 shares A What is the expected return on shares B If the beta of Macbeth s assets is 1 1 and the beta on its debt is 2 what would the beta of the equity be after the debt issue Sports R Us is financed solely by common stock and has outstanding 25 million shares with a market price of 10 a share It now announces that it intends to issue 160 million of debt and use the proceeds to buy back common stock A How many shares can the company buy back with the 160 million of new debt it issues B Who if anyone gains or loses by this transaction Sports R Us has issued debt with a market value of 100 million and has outstanding 15 million shares with a market price of 10 a share It now announces that it intends to issue a further 60 million of debt and use the proceeds to buy back common stock Debtholders seeing the extra risk mark the value of the existing debt down to 70 million A How is the market price of the stock affected by the announcement Calculate the number of shares the company can buy back with the 60 million new debt it issues B What is the debt ratio after the change in structure Wealth and Health Company is financed entirely by common stock which is priced to offer a 15 expected return The common stock price is 40 share The earnings per share are expected to be 6 If the company repurchases 25 of the common stock and substitutes an equal value of debt yielding 6 what is the expected value of earnings per share after refinancing Ignore taxes Fin 321 Assignment 3 Answer Sheet Name This sheet is for your answers only Attach it to the front of your worksheets graphs and any more detailed explanations that cannot fit here 1 A B 2 3 A B 4 A B 5 A B 6 7 A B 8 A B 9 A B 10


View Full Document

Access the best Study Guides, Lecture Notes and Practice Exams

Loading Unlocking...
Login

Join to view Assignment 3 and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Assignment 3 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?