Chap_15_Problem_Solutions
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Chap_15_Problem_Solutions

Course Number: BUS 225, Spring 2012

College/University: UNC Asheville

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Chapter 15: Investment Banking: Public and Private Placement Chapter 15 Problems 1. Dilution effect of stock issue (LO3) The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of $6,000,000 in the current year. The company is considering the issuance of 1 million additional shares that will net $30 per share to the corporation. a. What is the immediate dilution...

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15: Chapter Investment Banking: Public and Private Placement Chapter 15 Problems 1. Dilution effect of stock issue (LO3) The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of $6,000,000 in the current year. The company is considering the issuance of 1 million additional shares that will net $30 per share to the corporation. a. What is the immediate dilution potential for this new stock issue? b. Assume the Hamilton Corporation can earn 10.5 percent on the proceeds of the stock issue in time to include them in the current years results. Should the new issue be undertaken based on earnings per share? 15-1. Solution: 15-1 Chapter 15: Investment Banking: Public and Private Placement Hamilton Corporation a. Earnings per share before stock issue $6,000,000/4,000,000 = $1.50 Earnings per share after stock issue $6,000,000/5,000,000 = $1.20 b. Net income = $6,000,000 + .105 (1,000,000 $30) = $6,000,000 + .105 ($30,000,000) = $6,000,000 + $3,150,000 = $9,150,000 15-1. (Continued) Earnings per share after additional income EPS = $9,150,000/$5,000,000 = $1.83 Based on the current years results, the public offering should be undertaken. E.P.S. goes from $1.50 to 1.83. Of course, other variables may also be considered. 2. Dilution effect of stock issue (LO3) In problem 1, if the one million additional shares can only be issued at $23 per share and the company can earn 6.0 percent on the proceeds, should the new issue be undertaken based on earnings per share? 15-2. Solution: 2 Chapter 15: Investment Banking: Public and Private Placement Hamilton Corporation (Continued) Net income = $6,000,000 + .06 ($23,000,000) = $6,000,000 + $1,380,000 = $7,378,000 Earnings per share after additional income EPS = $7,378,000/5,000,000 = $1.48 No, E.P.S. would decline by 2 cents from $1.50 to $1.48. 3. Dilution effect of stock issue (LO3) American Health Systems currently has 6,000,000 shares of stock outstanding and will report earnings of $15 million in the current year. The company is considering the issuance of 1,500,000 additional shares that will net $50 per share to the corporation. a. What is the immediate dilution potential for this new stock issue? b. Assume that American Health Systems can earn 12 percent on the proceeds of the stock issue in time to include them in the current years results. Should the new issue be undertaken based on earnings per share? 15-3. Solution: American Health Systems a. Earnings per share before stock issue $15,000,000/6,000,000 = $2.50 Earnings per share after stock issue $15,000,000/7,500,000 = $2.00 15-3 Chapter 15: Investment Banking: Public and Private Placement b. Net income = $15,000,000 + .12 (1,500,000 $50) = $15,000,000 + .12 ($75,000,000) = $15,000,000 + $9,000,000 = $24,000,000 Earnings per share after additional income EPS = $24,000,000/7,500,000 = $3.20 Yes, the EPS of $3.20 is higher than $2.50. 4. Dilution effect of stock issue (LO3) In problem 3, if the 1,500,000 additional shares can be issued at $28 per share and the company can earn 10 percent on the proceeds, should the new issue be undertaken based on earnings per share? 15-4. Solution: American Health Systems (Continued) Net income = $15,000,000 + .10 (1,500,000 $28) = $15,000,000 + .10 ($42,000,000) = $15,000,000 + $4,200,000 = $19,200,000 Earnings per share after additional income EPS = $19,200,000/7,500,000 = $2.56 Yes, the EPS of $2.56 is higher than $2.50. 4 Chapter 15: Investment Banking: Public and Private Placement 5. Dilution and pricing effect of stock issue (LO3) Jordan Broadcasting Company is going public at $40 net per share to the company. There also are founding stockholders that are selling part of their shares at the same price. Prior to the offering, the firm had $24 million in earnings divided over eight million shares. The public offering will be for five million shares; three million will be new corporate shares and two million will be shares currently owned by the founding stockholders. a. What is the immediate dilution based on the new corporate shares that are being offered? b. If the stock has a P/E of 23 immediately after the offering, what will the stock price be? c. Should the founding stockholders be pleased with the $40 they received for their shares? 15-5. Solution: Jordan Broadcasting Company a. Earnings per share before stock issue $24,000,000 / 8,000,000 = $3.00 Earnings per share after stock issue $24,000,000 / $11,000,000 = $2.18 Note only three million new corporate shares were issued. The other two million belonged to founding stockholders and do not increase the number of shares outstanding. b. EPS $ 2.18 P/E 23 Stock price $50.14 c. The founding stockholders will probably not be pleased. They received a net price of $40 and the stock has a value of $50.14 immediately after the offering. They may wish the initial offering price had been higher. 15-5 Chapter 15: Investment Banking: Public and Private Placement 6. Underwriting Spread (LO2) Solar Energy Corp. has $5 million in earnings with 2 million shares outstanding. Investment brokers think the stock can justify a P/E ratio of 18. If the underwriting spread is 5 percent, what should the price to the public be? 15-6. Solution: Solar Energy Corp. Earnings per share = $5 million / 2 million = $2.50 Stock price (prior to underwriting spread) P/E x EPS = 18 x $2.50 = $45 Price to public (with 5% spread) $45 x 95% = $42.75 7. Underwriting Spread (LO2) Tiger Golf Supplies has 15 million in earnings with 4 million shares outstanding. Its investment banker thinks the stock should trade at a P/E ratio of 22. If there is an underwriting spread of 2.8 percent, what should the price to the public be? 15-7. Solution: Tiger Golf Supplies Earnings per share = $15 million / 4 million = $3.75 Stock price (prior to underwriting spread) P/E x EPS = 22 x $3.75 = $82.50 Price to public (with 2.8% spread) $82.50 x 97.2% = $80.19 6 Chapter 15: Investment Banking: Public and Private Placement 8. Underwriting Spread (LO2) Assume Fisher Food Products is thinking about three different size offerings for issuance of additional shares. Size of Offer Public Price a. $1.6 million...... b. 6.0 million...... c. 25.0 million...... $40 40 40 Net to Corporation $36.70 37.28 38.12 What is the percentage underwriting spread for each size offer? What principle does this demonstrate? 15-8. Solution: Fisher Food Products a. Spread = $40 $36.70 = $3.30 (on $1.6 million) % underwriting spread = $3.30 / $40 = 8.25% b. Spread = $40 $37.28 = $2.72 (on $6 million) % underwriting spread = $2.72 / $40 = 6.80% c. Spread = $40 $38.02 = $1.88 (on $25 million) % underwriting spread = $1.88 /$40 = 4.70% The principle demonstrated is the larger the offer size, the lower the percentage spread. 9. Underwriting spread (LO2)Walton and Company is the managing investment banker for a major new underwriting. The price of the stock to the investment banker is $18 per share. Other syndicate members may buy the stock for $18.25. The price to the selected dealers group is $18.80, with a price to brokers of $19.20. Finally, the price to the public is $19.50. a. If Walton and Company sells its shares to the dealer group, what will the percentage return be? b. If Walton and Company performs the dealers function also and sells to brokers, what will the percentage return be? c. If Walton and Company fully integrates its operation and sells directly to the public, what will its percentage return be? 15-9. Solution: 15-7 Chapter 15: Investment Banking: Public and Private Placement 8 Chapter 15: Investment Banking: Public and Private Placement Walton and Company a. $18.80 18.00 $ .80 $ .80 $18.00 b. $19.20 18.00 $ 1 .20 $ 1.20 18.00 c. $19.50 18.00 $ 1 .50 $ 1.50 18.00 10. Selected dealer groups price Managing investing bankers price Differential = 4.44% Return Brokers price Managing investing bankers price Differential = 6.67% Return Public price Managing investing bankers price Differential = 8.33% Return Underwriting spread (LO2) The Wrigley Corporation needs to raise $30 million. The investment banking firm of Tinkers, Evers, & Chance will handle the transaction. a. If stock is utilized, 2,000,000 shares will be sold to the public at $15.70 per share. The corporation will receive a net price of $15 per share. What is the percentage underwriting spread per share? b. If bonds are utilized, slightly over 30,000 bonds will be sold to the public at $1,001 per bond. The corporation will receive a net price of $992 per bond. What is the percentage of underwriting spread per bond? (Relate the dollar spread to the public price.) c. Which alternative has the larger percentage of spread? Is this the normal relationship between the two types of issues? 15-10. Solution: 15-9 Chapter 15: Investment Banking: Public and Private Placement Wrigley Corporation a. Spread = $15.70 $15.00 = $0.70 % underwriting spread = $.70$15.70 = 4.46% b. Spread = $1,001 $992 = $9 % underwriting spread = $9/$1,001 = .899% c. The stock alternative has the larger percentage spread. This is normal because there is more uncertainty in the market associated with a stock offering and investment bankers want to be appropriately compensated. 11. Secondary offering (LO2) Kevins Bacon Company Inc. has earnings of $6 million with 2,000,000 shares outstanding before a public distribution. Five hundred thousand shares will be included in the sale, of which 300,000 are new corporate shares, and 200,000 are shares currently owned by Ann Fry, the founder and CEO. The 200,000 shares that Ann is selling are referred to as a secondary offering and all proceeds will go to her. The net price from the offering will be $15.50 and the corporate proceeds are expected to produce $1.5 million in corporate earnings. a. What were the corporations earnings per share before the offering? b. What are the corporations earnings per share expected to be after the offering? 15-11. Solution: Kevins Bacon Company a. Earnings per share before the stock issue $6,000,000/$2,000,000 = $3.00 b. Earnings per share after the stock issue Total Earnings 10 Chapter 15: Investment Banking: Public and Private Placement Before offering Incremental Earnings Earnings after offering $6,000,000 1,500,000 $7,500,000 Corporate shares outstanding Before offering 2,000,000 Incremental Shares 300,000* Shares after offering 2,300,000 * The 200,000 secondary shares are not included as new corporate shares. 12. Market Stabilization and risk (LO2) Becker Brothers is the managing underwriter for a 1-million-share issue by Jays Hamburger Heaven. Becker Brothers is handling 10 percent of the issue. Its price is $25 per share and the price to the public is $26.40. Becker also provides the market stabilization function. During the issuance, the market for the stock turned soft, and Becker is forced to repurchase 40,000 shares in the open market at an average price of $25.75. They later sell the shares at an average value of $23. Compute Becker Brothers overall gain or loss from managing the issue. 15-12. Solution: Becker Brothers Original Distribution 10% 1,000,000 = 100,000 shares for Becker $ 1.40 profit per share $140,000 profit on original distribution Market Stabilization 40,000 $ 2.75 shares for Becker loss per share ($23.00 - $25.75) 15-11 Chapter 15: Investment Banking: Public and Private Placement $110,000 loss on market stabilization Gain on original distribution Loss on market stabilization Net gain 13. $140,000 110,000 $ 30,000 Underwriting costs (LO2) Trump Card Co. will issue stock at a retail (public) price of $30. The company will receive $27.60 per share. a. What is the spread on the issue in percentage terms? b. If the firm demands receiving a net price only $1.50 below the public price suggested in part a, what will the spread be in percentage terms? c. To hold the spread down to 3 percent based on the public price in part a, what net amount should Trump Card Co. receive? 15-13. Solution: Trump Card Company a. b. c. Public Price $30.00 3% Spread .90 Net Amount Received $29.10 14. Underwriting costs (LO2) Winston Sporting Goods is considering a public offering of common stock. Its investment banker has informed the company that the retail price will be $18 per share for 600,000 shares. The company will receive $16.50 per share and will incur $150,000 in registration, accounting, and printing fees. a. What is the spread on this issue in percentage terms? What are the total expenses of the issue as a percentage of total value (at retail)? b. If the firm wanted to net $18 million from this issue, how many shares must be sold? 12 Chapter 15: Investment Banking: Public and Private Placement 15-14. Solution: Winston Sporting Goods a. $18 $16.50 = $1.50 spread $1.50/$18.00 = 8.33% spread Total expenses = ($1.50 x 600,000 shares) + $150,000 (out-of-pocket) = $900,000 + $150,000 = $1,050,000 Total value = 600,000 shares $18 = $10,800,000 b. Amount needed = $18,000,000 Total shares to be sold to net $18,000,000 = ($18,000,000 + issue costs)/net price per share = $18,150,000/$16.50 per share = 1,100,000 shares 15. P/E ratio for new public issue (LO2) Rodgers Homebuilding is about to go public. The investment banking firm of Leland Webber and Company is attempting to price the issue. The home building industry generally trades at a 20 percent discount below the P/E ratio on the Standard & Poors 500 Stock Index. Assume that index currently has a P/E ratio of 25. Rodgers can be compared to the home building industry as follows: Rodgers Growth rate in earnings per share......... Consistency of performance................. Debt to total assets................................ Turnover of product.............................. Quality of management......................... 12 percent Increased earnings 4 out of 5 years 55 percent Slightly below average High 15-13 Homebuilding Industry 10 percent Increased earnings 3 out of 5 years 40 percent Average Average Chapter 15: Investment Banking: Public and Private Placement Assume, in assessing the initial P/E ratio, the investment banker will first determine the appropriate industry P/E based on the Standard & Poors 500 Index. Then point will be added to the P/E ratio for each case in which Rodgers is superior to the industry norm, and point will be deducted for an inferior comparison. On this basis, what should the initial P/E be for Rodgers Homebuilding? 15-15. Solution: Rodgers Homebuilding 80% of the Standard and Poors 500 Stock Index = 80% 25 = 20 Industry Comparisons Growth rate in earnings per share-superior Consistency of performance-superior Debt to total assets-inferior Turnover of product-inferior Quality of management-superior Quality of management-superior + + + + Initial P/E ratio = 20 + = 20 16. Dividend valuation model for new public issue (LO1) The investment banking firm of Einstein & Co. will use a dividend valuation model to appraise the shares of the Modern Physics Corporation. Dividends (D1) at the end of the current year will be $1.44. The growth rate (g) is 8 percent and the discount rate (Ke) is 12 percent. a. Using Formula 109 in Chapter 10, what should be the price of the stock to the public? b. If there is a 6 percent total underwriting spread on the stock, how much will the issuing corporation receive? c. If the issuing corporation requires a net price of $34.50 (proceeds to the corporation) and there is a 6 percent underwriting spread, what should be the price of the stock to the public? (Round to two places to the right of the decimal point.) 15-16. Solution: 14 Chapter 15: Investment Banking: Public and Private Placement Einstein & Co. b. Public Price Underwriting spread (6%) Net price to the corporation 17. $36.00 2.16 $33.84 Comparison of private and public debt offering (LO1) The Landers Corporation needs to raise $1 million of debt on a 25-year issue. If it places the bonds privately, the interest rate will be 11 percent. Thirty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 10 percent, and the underwriting spread will be 4 percent. There will be $100,000 in out-of-pocket costs. Assume interest on the debt is paid semiannually, and the debt will be outstanding for the full 25 year period, at which time it will be repaid. Which plan offers the higher net present value? For each plan, compare the net amount of funds initially availableinflowto the present value of future payments of interest and principal to determine net present value. Assume the stated discount rate is 12 percent annually. Use 6 percent semiannually throughout the analysis. (Disregard taxes.) 15-17. Solution: Landers Corporation Private Placement $1,000,000 debt 30,000 out-of-pocket costs $ 970,000 net amount to Landers 15-15 Chapter 15: Investment Banking: Public and Private Placement Present value of future interest payments interest payments (semiannually) = 11%/2 = 5.5% interest payments = 5.5% $1,000,000 = $55,000 PVA = A PVIFA (n 50, = i = 6%) PVA = $55,000 15.762 (Appendix D) PVA = $866,910 Present value of lump-sum payment at maturity PV = FV PVIF (n = 50, i = 6%) PV = $1,000,000 .054 (Appendix B) PV = $54,000 15-17. (Continued) Total present value of interest and maturity payments The net present value equals the net amount to Landers minus the present value of future payments. Public Issue 16 Chapter 15: Investment Banking: Public and Private Placement Present value of future interest payments interest payments (semiannually) = 10%/2 = 5% interest payments = 5% $1,000,000 = $50,000 PVA = A PVIFA (n = 50, i = 6%) PVA = $50,000 15.762 (Appendix D) PVA = $788,100 Present value of lump-sum payment at maturity PV = FV PVIF (n = 50, i = 6%) 15-17. (Continued) PV = $1,000,000 .054 (Appendix B) PV = $54,000 Total present value of interest and maturity payments Net present value equals the net amount to Landers minus the present value of future payments. 15-17 Chapter 15: Investment Banking: Public and Private Placement The private placement has the higher net present value ($49,090 vs. $17,900) 18. Features associated with a stock distribution (LO3) Midland Corporation has a net income of $15 million and 6 million shares outstanding. Its common stock is currently selling for $40 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of $21,660,000. The production facility will not produce a profit for one year, and then it is expected to earn a 15 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for $38 per share with a spread of 5 percent. a. How many shares of stock must be sold to net $21,660,000? (Note: No out-of-pocket costs must be considered in this problem.) b. Why is the investment banker selling the stock at less than its current market price? c. What are the earnings per share (EPS) and the price-earnings ratio before the issue (based on a stock price of $40)? What will be the price per share immediately after the sale of stock if the P/E stays constant? d. Compute the EPS and the price (P/E stays constant) after the new production facility begins to produce a profit. e. Are the shareholders better off because of the sale of stock and the resultant investment? What other financing strategy could the company have tried to increase earnings per share? 15-18. Solution: Midland Corporation a. $21,660,000 net amount to be raised. Determine net price to the corporation 18 Chapter 15: Investment Banking: Public and Private Placement Determine number of shares to be sold 15-18. (Continued) b. The new shares will increase the total number of shares outstanding and dilute EPS. This dilution effect may reduce the stock price in the market temporarily until income from the new assets becomes included in the price the market is willing to pay for the stock. By selling at below market value, the investment banker is attempting to attract investors into this temporarily dilutive situation. The investment banking firm is also reducing its own underwriting risk by pricing the issue at the lower value. c. EPS P/E ratio EPS after offering Price d. Net income = = = = $15,000,000/6,000,000 = Price/EPS = $40/$2.50 = $15,000,000/6,600,000 = P/E EPS = 16 $2.27 = $2.50 16x $2.27 $36.32 = $15,000,000 + 15% ($21,660,000) = $15,000,000 + $3,249,000 = $18,249,000 EPS after contribution = $18,249,000/6,600,000 =$2.77 Price = P/E EPS = 16 $2.77 = $44.32 15-19 Chapter 15: Investment Banking: Public and Private Placement e. In the long run, it appears that the company is better off because of the additional investment. Earnings per share are $.27 higher and the stock price also increased. If the firm had used debt financing or a combination of debt and stock, they would have increased earnings per share even more, but would have created additional financial obligations in the process. 19. Dilution and rates of return (LO3) The Presley Corporation is about to go public. It currently has aftertax earnings of $7,500,000 and 2,500,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 600,000 new shares. The new shares will be priced to the public at $20 per share, with a 5 percent spread on the offering price. There will also be $200,000 in out-of-pocket costs to the corporation. a. b. c. d. Compute the net proceeds to the Presley Corporation. Compute the earnings per share immediately before the stock issue. Compute the earnings per share immediately after the stock issue. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public. e. Determine what rate of return must be earned on the proceeds to the corporation so there will be a 5 percent increase in earnings per share during the year of going public. 15-19. Solution: Presley Corporation a. $20 price 95% = $19 net price $19 600,000 $11,400,000 200,000 $11,200,000 b. 20 net price new shares proceeds before out-of-pocket costs out-of-pocket costs net proceeds Chapter 15: Investment Banking: Public and Private Placement c. 15-19. (Continued) d. There are now 3,100,000 shares outstanding. To maintain earnings of $3 per share, total earnings must be $9,300,000 ($3 x 3,100,000 shares). This would imply an increase in earnings of $1,800,000 ($9,300,000 $7,500,000). 16.07% must be earned on the net proceeds to produce EPS of $3.00. e. $3.00 (1.05) = $3.15 (5% increase in EPS) Total earnings = $3.15 3,100,000 shares = $9,765,000 incremental earnings = $9,765,000 $7,500,000= $2,265,000 20.22% would have to be earned to produce EPS of $3.15 and the 5% growth in EPS. 15-21 Chapter 15: Investment Banking: Public and Private Placement 20. Dilution and rates of return (LO3) Tyson Iron Works is about to go public. It currently has aftertax earnings of $4,500,000 and 3,000,000 shares are owned by the present stockholders. The new public issue will represent 400,000 new shares. The new shares will be priced to the public at $15 per share with a 4 percent spread on the offering price. There will also be $160,000 in out-of-pocket costs to the corporation a. b. c. d. Compute the net proceeds to Tyson Iron Works. Compute the earnings per share immediately before the stock issue. Compute the earnings per share immediately after the stock issue. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public. e. Determine what rate of return must be earned on the proceeds to the corporation so there will be a 10 percent increase in earnings per share during the year of going public. 15-20. Solution: Tyson Iron Works a. $15 96% = $14.40 net price $14.40 400,000 $5,760,000 160,000 $5,600,000 22 net price new shares proceeds before out-of-pocket costs out-of-pocket costs net proceeds Chapter 15: Investment Banking: Public and Private Placement 15-20. (Continued) d. There are now 3,400,000 shares outstanding. To maintain earnings per share of $1.50, total earnings must be $5,100,000 ($1.50 3,400,000 shares). This would imply an increase in earnings of $600,000 ($5100,000 $4,500,000) 10.71% must be earned on the net proceeds to produce EPS of $1.50. e. $1.50 (1.10) = $1.65 (10% increase in EPS) total earnings = $1.65 3,400,000 = $5,610,000 incremental earnings = $5,610,000 - 4,500,000 = $1,110,000 19.82% would have to be earned to produce EPS of $1.65. 21. Aftermarket for new public issue (LO4) I. B. Michaels has a chance to participate in a new public offering by Hi-Tech Micro Computers. His broker informs him that demand for the 500,000 shares to be issued is very strong. His brokers firm is assigned 15,000 shares in the distribution and will allow Michaels, a relatively good customer, 1.5 percent of its 15,000 share allocation. The initial offering price is $30 per share. There is a strong aftermarket, and the stock goes to $33 one week after issue. The first full month after issue, Mr. Michaels is pleased to observe his shares are selling for $34.75. 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 $28.75. a. Compute the total dollar profit or loss on Mr. Michaelss shares one week, one month, and one year after the purchase. In each case compute the profit or loss against the initial purchase price. 15-23 Chapter 15: Investment Banking: Public and Private Placement b. Also compute this percentage gain or loss from the initial $30 price and compare this to the results that might be expected in an investment of this nature based on prior research. Assume the overall stock market was basically unchanged during the period of observation. c. Why might a new public issue be expected to have a strong aftermarket? 15-21. Solution: I. B. Michaels a. Mr. Michael's purchase = 1.5% 15,000 shares = 225 shares Dollar profit or loss 1 week 225 shares ($33 $30) = $ 675.00 profit 1 month 225 shares ($34.75 $30) = $1,068.75 profit 1 year 225 shares ($28.75 $30) = $ 281.25 loss b. Percentage profit or loss 1 week $3.00/$30 1 month $4.75/$30 1 year $1.25/$30 = +10.00% = +15.83% = 4.17% 15-21. (Continued) The results are in line with prior research. The stock went up one week and one month after issue, but actually provided a negative return for one year after issue. This is consistent with the research of Reilly (footnote 1 in this chapter), which showed excess returns of 10.9 percent, 11.6 percent and 3.0 percent over comparable periods of study. Actually, the stock was a bit stronger than that indicated by the Reilly research for one month after issue. 24 Chapter 15: Investment Banking: Public and Private Placement c. A new public issue may be expected to have a strong aftermarket because investment bankers often underprice the issue to insure the success of the distribution. 22. Leveraged buyout (LO5) The management of Mitchell Labs decided to go private in 2002 by buying in all 3 million of its outstanding shares at $19.50 per share. By 2006, management had restructured the company by selling off the petroleum research division for $13 million, the fiber technology division for $9.5 million, and the synthetic products division for $21 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 $1.25 this year. Investment bankers have contacted the firm and indicated that if it reentered the public market, the 3 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 16 times earnings per share. a. What was the initial total cost to Mitchell Labs to go private? b. What is the total value to the company from (1) the proceeds of the divisions that were sold, as well as (2) the current value of the 3 million shares (based on current earnings and an anticipated P/E of 16)? c. 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. 15-22. Solution: Mitchell Labs a. 3 million shares $19.50 = $58.5 million (cost to go private) b. Proceeds from sale of the divisions Petroleum research division Fiber Technology division Synthetic products division $13.0 9.5 21.0 $43.5 Current value of the 3 million shares 15-25 million million million million Chapter 15: Investment Banking: Public and Private Placement 3 million shares (P/E EPS) 3 million (16 $1.25) 3 million $20 $60.0 Total value to the company $103.5 million million 15-22. (Continued) c. Total value to the company Cost to go private Profit from restructuring $103.5 58.5 $ 45.0 million million million COMPREHENSIVE PROBLEM Bailey Corporation (impact of new public offering) (LO4) 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 firms investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows: BAILEY CORPORATION Income Statement For the Year 201X Sales (all on credit)........................................... Cost of goods sold............................................. Gross profit....................................................... Selling and administrative expenses................. Operating profit................................................. Interest expense................................................. Net income before taxes.................................... Taxes................................................................. Net income........................................................ 26 $42,680,000 32,240,000 10,440,000 4,558,000 5,882,000 600,000 5,282,000 2,120,000 $ 3,162,000 Chapter 15: Investment Banking: Public and Private Placement CP 15-1. (Continued) BAILEY CORPORATION Balance Sheet As of December 31, 201X Assets Current assets Cash.............................................................. Marketable securities................................... Accounts receivable..................................... Inventory...................................................... Total current assets..................................... Net plant and equipment................................... Total assets........................................................ Liabilities and Stockholders Equity Current liabilities: Accounts payable......................................... Notes payable............................................... Total current liabilities............................. Long-term liabilities.......................................... Total liabilities.................................................. Stockholders equity: Common stock (1,800,000 shares at $1 par). Capital in excess of par................................. Retained earnings.......................................... Total stockholders equity........................... Total liabilities and stockholders equity.......... $ 250,000 130,000 6,000,000 8,300,000 $14,680,000 13,970,000 $28,650,000 $ 3,800,000 3,550,000 7,350,000 5,620,000 $12,970,000 $ 1,800,000 6,300,000 7,580,000 15,680,000 $28,650,000 a. 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. b. Assuming an underwriting spread of 5 percent and out-of-pocket costs of $300,000, what will net proceeds to the corporation be? c. What return must the corporation earn on the net proceeds to equal the earnings per share before the offering? How does this compare with current return on the total assets on the balance sheet? 15-27 Chapter 15: Investment Banking: Public and Private Placement d. Now assume that, of the initial 800,000-share distribution, 400,000 belong to current stockholders and 400,000 are new shares, and the latter will be added to the 1,800,000 shares currently outstanding. What will earnings per share be immediately after the public offering? What will the initial market price of the stock be? Assume a priceearnings ratio of 12 and use earnings per share after the distribution in the calculation. e. Assuming an underwriting spread of 5 percent and out-of-pocket costs of $300,000, what will net proceeds to the corporation be? f. What return must the corporation now earn on the net proceeds to equal earnings per share before the offering? How does this compare with current return on the total assets on the balance sheet? CP 15-1. Solution: New Public Offering Bailey Corporation 28 Chapter 15: Investment Banking: Public and Private Placement In order to earn $1.76 after the offering, the return on $10,826,400 must produce new earnings equal to X. CP 15-1. (Continued) The firm must earn 13.06% on net proceeds to equal earnings per share before the offering. This is greater than current return on assets of 11.04%. 15-29 Chapter 15: Investment Banking: Public and Private Placement CP 15-1. (Continued) Initial market price = P/E EPS 12 $1.44 = $17.28 e. 400,000 $17.28 = $6,912,000 345,600 300,000 $6,266,400 gross proceeds 5% spread out-of-pocket costs net proceeds f. $3,162,000 + X = $1.76 (2,200,000) X = $3,872,000 $3,162,000 X = $710,000 proof: 30 Chapter 15: Investment Banking: Public and Private Placement CP 15-1. (Continued) thus: This is greater than the current return on assets of 11.04%. 15-31

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UNC Asheville - BUS - 225
Chapter 16Problems(Assume the par value of the bonds in the following problems is $1,000 unless otherwisespecified.)1.Bond yields (LO2) Garland Corporation has a bond outstanding with a $90 annual interestpayment, a market price of $820, and a matur
UNC Asheville - BUS - 225
Chapter 2 Questions Foundations ofFinancial Management1) Discuss some financial variables that affect the price-earnings ratio Influence by earnings and by share price changes Debt-equity Dividend payment policy Sales growth Quality of management
UNC Asheville - BUS - 225
Chapter 9: Time Value of MoneyKey EquationsFV = Future ValueFVIF = (1+i)n or Appendix APV = Present ValuePVIF = 1 (1+i)n or Appendix Bi = Interest RateFVIFA = [(1+i)n-1) i] or Appendix Cn = Number of paymentsPVIFA = [(1 - (1 (1+i)n) i)] or Append
UNC Asheville - BUS - 225
Comprehensive Problem 2SolutionSun Microsystems1. Percentage change in net income per common share-diluted19991998$ .31$ .24$ .07+29.2%20001999$ .55$ .31$ .24+77.4%20012000$ .27$ .55$.2850.9%2. Profit margin19981999200020017.66%
Texas A&M - MATH - 141
ScarboroughMATH 141 Week In Review 1Spring 201211. The demand for a VCR is 8000 units when the price is $230. If the price drops down to $210 then 9000are sold. The manufacturer will not market VCRs if the price drops to $100. For each $60 increase
Texas A&M - MATH - 141
ScarboroughMATH 141 Week In Review 2Spring 201211. A nutritionist wants to create a lunch for a client containing 880 calories and 186g of carbohydrates.The meal is to be created using two foods: Food I and Food II. Determine the number of units of
Texas A&M - MATH - 141
ScarboroughMATH 141 Week In Review 3Spring 201211. The monthly supply and demand functions for a metallic Texas A&M car emblem are given below,where x is the quantity and p is the price per emblem in dollars. Determine the equilibrium price andquan
Texas A&M - MATH - 141
ScarboroughMATH 141 Week In Review 41. Graph the system of equations:5 x 6 y 304 x 3 y 12Spring 2012. Mark the solution set with an S. Is the solution setbounded or unbounded?2. Maximize and minimize C 6 x 9 y subject to:2x 4 y 1x 2y2 x8Is th
Texas A&M - MATH - 141
ScarboroughMATH 141 Week In Review 5Spring 201211. If A = cfw_m, a, t1, h, e, t2, i, c, s, how many subsets does set A have?2. Given the Venn diagram:a.Shade N M LC .b.b, f c.N L d.M C L M e.a, e, h f.Give two examples of proper subsets
Colorado - CHEM - 342
KMM608EAdvancedChemicalReactionEngineeringSpring2012Homework11. The data provided on the attached file were obtained via the adsorption of nitrogen at 77 Kon a microporous/mesoporous material. Use appropriate model/models to characterize thesurface
Colorado - CHEM - 342
Solid Catalysts by Reactor Fixed-bed catalysts relatively large particles (several mm) mechanical strength important (fines formation) Moving-bed catalysts idem fixed-bed spherical particles (to flow smoothly) Slurry-reactor catalysts powders (25
Colorado - CHEM - 342
3rd Edition, CD ROM Chapter 12 Professional Reference Shelf (i.e., CD ROM Shelf)R12.3Fluidized-Bed Reactors1When a man blames others for his failures, its a good idea to creditothers with his successes. Howard W. NewtonThe fluidized-bed reactor has
Wisconsin - MED PHYS - 559
MedicalPhysics559:PatientSafetyandErrorReductioninHealthcare2012MeetinginG5/119ClinicalScienceCenterMondays5:057:00p.m.Coordinator:BruceThomadsen(34183)Lecture MonthDateInstructorTopicChapterReadingsumberCarayon1January23SmithClinicalModels
Wisconsin - MED PHYS - 559
Effects of a Specialized Team on Stroke Care: The First Two Years of the Yale Stroke Program[Original Contribution] Webb, Deborah J. RN MSN; Fayad, Pierre B. MD; Wilbur, Christine OT; Thomas, Angela MSW; Brass, Lawrence M. MD Received December 12, 1994;
Wisconsin - MED PHYS - 559
EHRs The Good, the Bad andthe UglyWhat are the hazards associated with IT andEHR use and how can we minimize them?John W. Beasley, MDProfessor, UW Department of Family Medicine,Honorary Associate, UW Department of Industrial andSystems Engineering
Wisconsin - MED PHYS - 559
Human Factors and Aviation SafetyDouglas A. Wiegmann, Ph.D.dawiegmann@wisc.eduOverview Approaches to Aviation Safety Reactive Approaches to Safety Accident investigation Proactive Approaches to Safety Near miss reporting systems Conclusion/ Q&A P
Wisconsin - MED PHYS - 559
ErrorsandHumanPerformanceErrorsandHumanPerformanceBruce ThomadsenUniversity ofWisconsin MadisonLearningObjective:LearningObjective:PerformanceFailuresHappenTo understand why and how people fail requiresTounderstanding how they succeed.understan
Wisconsin - MED PHYS - 559
MonthDate1234January5February6,789101112Instructor23SmithThomadsen30 CarayonThomadsenTopicCarayon Bogner6ViethClinicalModelsofQualityErrorReductionApproachestoPatientSafetyWorkSystemDesignInfluencesUseofRiskAnalysisinRiskManage
Wisconsin - MED PHYS - 559
Introduction to MedPhys 559: Patient Safety and Error ReductionWelcome to the Patient Safety Class for 2011. This message provides some important information aboutthe course.1. Number of credits. Several students from ISysE or working on a Patient Safe
Wisconsin - MED PHYS - 559
ii64How will we get the data and what will we do with it then? Issues in the reporting of adverse healthcare eventsC W Johnson. Qual Saf Health Care 2003;12(Suppl II):ii64ii67Incident reporting has been proposed as an important means of identifying an
Wisconsin - MED PHYS - 559
ARTICLE IN PRESSApplied Ergonomics ] (]) ] www.elsevier.com/locate/apergoToward a theoretical approach to medical error reporting system research and designBen-Tzion Karsha, Kamisha Hamilton Escotob, John W. Beasleyc, Richard J. Holdenba bDepartment
Wisconsin - MED PHYS - 559
The Impact of Electronic Health Records on Physicians and Patients in Primary CareJamie Lapin, B.S.Industrial and Systems EngineeringUniversity of Wisconsin - MadisonApril 29, 2008IE 859SummaryThere has been a push by the Federal Government and the
Wisconsin - MED PHYS - 559
Bruce ThomadsenUniversity ofWisconsin -MadisonQuality ManagementGeneral Concepts and Development We have set up the Quality Program, What do we do to try to maintain quality?SoLearning Objectives Without s Safety Culture in the organization, litt
Wisconsin - MED PHYS - 559
Error Reporting SystemsBruce ThomadsenBen-Tzion KarshSo Far in the Course We have discussed proactive measures to addresspatient safety Systems approach Risk assessment FMEA Many hazards are transient Mostly, design can prevent errors that can b
Wisconsin - MED PHYS - 559
Wisconsin - MED PHYS - 559
PatientSafetyontheNationalLevelLearningObjectivesLearningObjectivesTounderstandtheJointCommissionsNationalPatientSafetyGoals;Tounderstandsomeproblemsfacingcliniciansinpatientsafety;andTolearnaboutPatientSafetyOfficersandtheUWPatientSafetyCertifica
Wisconsin - MED PHYS - 559
AHRQ Web M&M - http:/www.webmm.ahrq.gov/
Wisconsin - MED PHYS - 559
FirstSomeCommentsFirstSomeCommentsaboutLeanLeanisfrequentlymisunderstood;everyonetellsyouthat.Butoneofthemostmisunderstoodaspectsisthatnonvalueaddedtimeoftenaddsvalue.ForexampleQualityManagementQualityManagementGeneralConceptsandDevelopmentBruc
Wisconsin - MED PHYS - 559
UW HealthQuality, Safety &InnovationsDepartment(QSI)Agenda Strategic View QSI Department Description QSI Domains of ServiceUW Health Strategic PlanFocus AreasQuality DistinctionService ExcellenceIntegration and AlignmentClinical PrioritiesG
Wisconsin - MED PHYS - 559
Leading Quality in HealthcareCarl ViethUniversity of WisconsinDepartment of Engineering ProfessionalDevelopmentFebruary, 20111Todays SessionSetting our learning objectivesProvide a context for quality in HealthcareDefine qualityDifferentiate qu
Wisconsin - MED PHYS - 559
EventsandQMEventsandQMinRadiotherapyBruceThomadsenUniversityofWisconsinMadisonHistoryofQMinRadiotherapyHistoryofQMinRadiotherapyItslong!WevebeendoingQMofsomesortclosetothebeginning,thatis,about1900.Well,thatbeginningmayhavebeenexposingtheoper
Wisconsin - MED PHYS - 559
Patient Safety and ErrorReductionIn Health CareFrank Rath, Faculty Associate in the College of EngineeringProgram Director - Engineering Professional DevelopmentDirector Operational Excellence Through Lead Time Reduction - 263-5989;rath@engr.wisc.ed
Wisconsin - MED PHYS - 559
RiskAnalysisBruce ThomadsenBruceVicki BierAccidents and errors happen as a result of:equipment failures human failures faulty proceduresWe must try to minimize future disasters byWebeing conscious of the risks associated withany system.anyLea
Wisconsin - MED PHYS - 559
RootCauseAnalysisRootCauseAnalysisRootCauseAnalysisBruceThomadsenUniversityofWisconsinMadisonAnalysisAnalysisAssumeyouhaveanevent. Whattodo? Theanalysiswouldliketogettotherootcause.RCATeamRCATeamFirst,assembleanrootcauseanalysisteam.Themem
Wisconsin - MED PHYS - 559
Medical Physics 559Patient Safety andError Reduction in Health CareApril 2012OutlineHistory of Emergency MedicineStatus of Emergency DepartmentsEmergency Medicine at UW HealthUW Health Emergency MedicineQuality ManagementUW Health ED QI Initiati
Wisconsin - MED PHYS - 559
Ann Intern Med - Emanuel and Emanuel 124 (2): 229Page 1 of 16Search Annals: Advanced searchHome | Current Issue | Past Issues | Search | Collections | PDA Services | Subscribe | Contact Us | Help | ACP OnMEDICINE AND PUBLIC ISSUESWhat Is Accountabili
Wisconsin - MED PHYS - 559
Medication UseSafety in PracticeReduction inMedication ErrorsPresentation Objectives Learn about the costs and human toll of medicationproblems Describe each phase of the medication use process Analyze errors within this process Understand why un
Wisconsin - MED PHYS - 559
ReguLogic Consulting, LLCThe Medical DeviceManufacturers ApproachTo Patient SafetyKen Buroker, PEMedical Device RA/QA ConsultantMedical Physics 559April 9, 2012Speakers Background Currently consulting in Medical DeviceManufacturing Industry For
UWO - BIOCHEM - 2280
Alberts - Essential Cell BiologyChapter 1: Introduction to CellsThe cell has a distinct anatomy. It is enclosed by a membrane, in the middle lies the nucleus.Around the nucleus lies the cytoplasm , that fills the cells interior together with theorgane
UWO - BIO - 1002
Lecture 5:Energy &ThermodynamicsEnergy Capacity to do work Kinetico Energy possessed by an object because it is in motion Potential/Chemical Potentialo Stored energy: the energy an object has because of its location orchemical structureThermodyn
UNSW - ARTS - 1450
Lesson 6 Pattern 1: as prepositionPattern 2:-VerbPattern 3: V1 (, V2)Pattern 4: S-Place-(Verb)Pattern 5: Auxiliary verb -VerbWeek 9Pattern 1: as a prepositionBenefactive phraseS (person) V-O Basic patternS()VO S () V-O NegativeSAdv()VO
UNSW - ARTS - 1450
Lesson 8 1: time/location expression + V.23: 4: sequence of actions5. 6: 7. and comparedWeek111. Time-when before the verbMain action:Time-when(Subject)Verb-objectBefore (S)VO(S)VO When (S)VO(S)VO After (S)VO(S)VO 1: time/location expr
UNSW - ARTS - 1450
Lesson9 Pattern1: Pattern2:number/MW/color/clothingPattern3:moneyPattern4: vs Pattern5:A B( ) Pattern6: Pattern1Modifer (Noun)NounphraseNoun NounphraseNoun (Adv)Adj. WaystomodifyanounPossessor: Quantity: Color: , Adjective: Noun: ?SL
UNSW - ARTS - 1450
ARTS1450 LectureLessonLesson 1: Greetings wn hoWeek 3!!,,!,, !How to Address People in China?In Chinese, family names () always precede given names ().e.g. 1) Family name + professionWange.g. = Teacher Wang2) Family name + titlese.g. = M
UNSW - ARTS - 1450
ARTS1450 LectureLesson FamilyLesson 2: Family (jitng)Week 4 (jitng) - Family1) Why Family is soimportant ?2) In terms of family(and social/ethicalvalues), are thereany differencesbetween East (suchas Chinese) andWest (such asAustralian)? (
UNSW - ARTS - 1450
ARTS1450 LectureLesson 3: Dates & Time (shjin)Week 5A Summary of the GrammarNumbers - , , , Date - , , / , Time - , , , Verbs & Pivotal Sentences - S + T (Adverbial of Time) + V + OAlternative Questions A B ?Adjectives - (hn)A not-A Question
UNSW - ARTS - 1450
ARTS1450: Lesson 7Descriptive Complements: Can be used after a verb or an adjective. What follows in theconstruction introduced in this lesson is called a descriptivecomplement. These comments serve as comments on the actionsexpressed by the verbs th
UNSW - ARTS - 1450
Chinese Pronunciation: Pinyin INITIALSFINALSbpmfiudtnlaoegkhaieiao oujqxan en ang engzcserzh ch shria iaoieiuianinianging(iou)ua uo uaiuiuan un uang ong(uei)(uen)e(ueng)an nIf theres no initial before i, u,
UNSW - ARTS - 1450
Integrated ChineseLevel 1 Part 1IntroductionWeek 1housekeepingUnit outlineAssessmentsClass RulesIcebreakingFind someone who: (and write down their names)1. Speakers at least five sentences in Mandarin2. Is born in China3. Has their birthday in
UNSW - ARTS - 1450
LESSON1 GreetingsWeek 3 Tonemarks:abovethemainvowelsofasyllable,whichfollowsthesequenceofa-o-e-i-u-Exception: iu e.g. li MondaytoSunday: (xngq)x JanuarytoDecember:x yue4 Nihaolanguagelab:http:/www.chinasoft.com.au/lab/lab.htmlIConline:http:/w
UNSW - ARTS - 1450
Lesson 2: Family Pattern 1: measure wordsPattern 2: question wordsPattern 3: adverbs ( , etc.)Pattern 4: occupationsMeasure wordsNumber + Measure word + Noun + Measure word + Noun + Measure word + Noun1: (No.) (Measure Word) Noun ?1 ?7 ?41
UNSW - ARTS - 1450
Lesson 3 Dates and TimePattern 1:Pattern 2:Pattern 3:Pattern 4:timedatespivotal sentences1.Time Hour ( ) Hour Minutes Hour Hour Minutes Hour or hour Minutes 1: ?1: ?1: ?1: ?1: ?1: ?1: ?1: ?1: ?1: ?
UNSW - ARTS - 1450
Lesson4Hobbies S SubjectTimeAdverbVerbObjectS Affirmative+negativequestions,e.g.:Subject - - VerbObject?Subject ( ) - - VerbObject?S SubjectTime VerbObjectS conjunctionword WordorderinChineseS Subject+adv+Verb+objectS (time,place,manneretc)E.g.
UNSW - ARTS - 1450
Lesson 5 Visiting Friends Making a suggestion Verb Object Verb Object vs Adjectives used as predicates Adjective acts like a verb Often seen in Subject Adjective E.g. ?practicet r ansl at i onAr e you happy t oday?I m ver y happy.Is
UNSW - ARTS - 1450
Week 2Pinyin (continued)Chinese Writing SystemChinese pronunciation: pinyinSing a song: Chinese alphabet songu(v)wxyzopqrsthijklmnabcdefgSome tips in pinyin hat off rule: drops off the two dots (umlaut) after j,q, x, and
Iowa State - IE - 361
IE312OptimizationSiggiOlafsson3018Blackolafsson@iastate.edu1OptimizationInthisclassyouwilllearntosolveindustrialengineeringproblemsbymodelingthemasoptimizationproblemsYouwillunderstandcommonoptimizationalgorithmsforsolvingsuchproblemsYouwilllea
CUNY Baruch - ACCT - 2101
5. (a)Calculate American Eagles inventory turnover ratio and average days ininventory for the most recent year.5.(b) Calculate The Buckles inventory turnover ratio and average days ininventory for the most recent year.The inventory turnover ratio show
UNSW - FINS - 1612
Chapter 2Commercial BanksWebsites:www.apra.gov.auwww.asic.gov.auwww.accc.gov.auwww.rbnz.govt.nzwww.anz.com.auwww.commbank.com.auwww.nab.com.auwww.westpac.com.auCopyright 2009 McGraw-Hill Australia Pty Ltd21Learning Objectives Evaluate the fu
UNSW - FINS - 1612
Chapter 1A Modern FinancialSystemAn OverviewWebsites:www.rba.gov.auwww.treasury.gov.auwww.bis.orgwww.ny.frb.orgwww.asx.com.auwww.ft.com/asia/Copyright 2009 McGraw-Hill Australia Pty LtdPPTs t/a Financial Institutions, Instruments and Markets 6e
UNSW - FINS - 1612
Chapter 4The Share Marketand the CorporationWebsites:www.asic.gov.auwww.asx.com.auwww.nyse.comCopyright 2009 McGraw-Hill Australia Pty Ltd41Learning Objectives Understand the nature of corporations and reasons forpublic listing Discuss the rol
UNSW - FINS - 1612
Chapter 5Corporations Issuing Equity in theShare MarketWebsite:www.asx.com.auCopyright 2009 McGraw-Hill Australia Pty Ltd51Learning Objectives Understand capital budgeting issues Examine issues relevant to the choice between debtand equity fundi