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chprobSM_ch15 - Chapter 15 Long-Term Financing An...

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Chapter 15: Long-Term Financing: An Introduction 15.1 Assuming that the common shares have no par value: Before the issue After the issue Common shares 1,500,[email protected]$/share $3,000,000 Common shares $3,100,000 Retained earnings $200,000,000 Retained earnings $200,000,000 Total $203,000,000 Total $203,100,000 New Book value per share is 203,100,000/1,502,000shares=135.22/share New Market-to-Book ratio is $50/$135.22=0.36977 15.2 Assuming that the shares are repurchased at $50 per share and cancelled: Before the purchase After the purchase Common shares 1,500,[email protected]$/share $3,000,000 Common shares 1’499’[email protected]$/share $2,999,800 Retained earnings $200,000,000 Retained earnings $199,995,200 Total $203,000,000 Total $202,995,000 Alternatively, if the shares are not cancelled and remain as Treasury Stock, the accounts would be as follows: After the purchase Common shares 1,500,[email protected]$/share $3,000,000 Treasury Stock (5,000) Retained earnings $200,000,000 Total $202,995,000 15.3 Corporate bonds yields are usually higher. Corporations may receive dividends on preferred stock tax free, so they are willing to accept a lower pretax yield. Other corporations and institutions are the big investors in preferred stock. 15.4 The following table summarizes the main difference between debt and equity. Debt Equity Repayment is an obligation of the firm Yes No Grants ownership of the firm No Yes Provides a tax shield Yes No Answers to End-of-Chapter Problems B-209
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Liquidation will result if not paid Yes No When corporations try to create a debt security that is really equity, they are trying to obtain the tax benefits of debt while eliminating its bankruptcy costs. Preferred stock is like an “equity bond” because: 1. Preferred holders receive a stated dividend. 2. In case of liquidation, preferred holders are senior to common shareholders. 3. Often, preferreds carry credit ratings. 4. Preferreds are sometimes convertible into common shares. 5.
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chprobSM_ch15 - Chapter 15 Long-Term Financing An...

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