UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGNCollege of BusinessD E P A R T M E N T O F F I N A N C EFinance 321 – Advanced Corporate Finance – Spring 2007Assignment 3 (20 points)Lectures 12-17Due April 12, 2007Each 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. InvestorBid Price# Shares 1 125 100,0002 123 200,0003 121 250,0004 119 150,0005 117 100,0006 115 200,0007 113 100,0008 111 150,0009 109 350,00010 107 100,00011 105 400,00012 103 100,00013 101 200,00014 99 150,00015 97 150,00016 95 200,00017 93 250,00018 91 150,00019 89 250,00020 87 150,00021 85 250,00022 83 300,00023 81 100,00024 79 150,000A. What would the offering price be on this IPO?B. How many shares would investor 13 receive?2. 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.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?4. Use the following information for this question. Earnings per share for 2007 $8.00Number of shares outstanding30 millionTarget payout ratio 40%Planned dividend per share $4.80Stock price 12/31/07 $85.50The dividend will be paid in early January 2008. Assume that there are no corporate or personal income taxes. 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?5. 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?6. Briefly explain the information content of a share repurchase.7. 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?8. Sports R’ Us is financed solely by common stock and has outstanding 25 million shares with amarket 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?9. 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?10. 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.