9 10 11 12 13 probl ems 1 yul com pany has just

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Unformatted text preview: floated an IPO. Under a firm-com mitment underwriting agreemen t, Yul received $10 for each of the 1 million shares sold. The initial offering price was $11 per share, and the price rose to $14 in the first few minu tes of trading. Yul paid $60,000 in direct legal and other costs; indirect costs were $40,000 . What was the flotation cost as a percentage of funds raised? 2. A com pany requires $15 million in equity financing. Direct costs of a cash offering (including the spread, but excluding underpricing) equal 12% of the financing obtained. How large mu st the issue be to provide the firm with the required financing? How mu ch are the dollar flotation costs for this offering? | v v 131 | e-Text Main Menu | Textbook Table of Contents | Study Guide Table of Contents 3. Firms A and B have announ ced IPOs; each firm's stock will be sold for $10 per share. One of these issues is undervalued by $1, while the other is overvalued by $.50, but you are unable to determine which is undervalued and which is overvalued. You plan to buy 100 shares of each. If an issue is rationed, you will be able to purchase only half of your order. If you are able to buy 100 shares of each firm's stock, what is your profit? What profit do you actually expect? Use the following information to solve Problem s 4-7: Ebbets Manufacturin g Co. has been experiencing financial difficulties since its major custom er mo ved to Chav ez Ravine. However, Ebbets is considering expansion into a new line of business. The expansion requires $4,500,00 0 of financing, which will be obtained through a cash offering of com mon stock. Ebbets currently has 5,000,000 shares of com mon stock outstanding and no debt. The firm's book value is $60,000 ,0 00 and net incom e is currently $7,500,00 0. Ebbets com mon stock currently sells for $9. 4. Calculate each of the following for Ebbets, without the expansion: book value per share (BPS ), earnings per share (EPS ), price earnings (P/E) ratio, return on equity (ROE), market-to-book ratio. 5. Assum e the firm's P/E ratio and ROE remain constant. Calculate each of the following for Ebbets, after the expansion: book value per share, EPS , market price per share, market-to-book ratio. 6. What is the net present value of the expansion under consideration by Ebbets? | v v 132 | e-Text Main Menu | Textbook Table of Contents | Study Guide Table of Contents 7. Supp ose the NP V of the expansion is $1,000,00 0. What is the market value of the com mon stock after the expansion? 8. Em ery Enterprises has announ ced a rights offering to obtain $10 million of equity financing for a new publishing project. The stock currently sells for $80 per share; there are 2 million shares outstanding. If Em ery sets the subscription price at $20 per share, how man y shares mu st be sold? How man y rights are required in order to buy one share? 9. For the offering described in Problem 8, what is the ex-rights price? What is the value of a right? 10. Supp ose an investor who own s 100 shares of Em ery com mon stock intends to sell her rights, rather than purchase additional shares. Dem onstrate that she is not harmed by the rights offering. 11. Supp ose that the investor described in the previous problem decides to exercise, rather than sell, her rights. How does this course of action affect her total wealth? 12. Supp ose the rights described in Problem s 8 and 9 are trading for $10. How will this affect the investor who own s 100 shares of Em ery com mon stock? What action wou ld you recomm end to an investor who does not own Em ery com mon stock? | v v 133 | e-Text Main Menu | Textbook Table of Contents | Study Guide Table of Contents 13. Supp ose the rights described in Problem s 8 and 9 are trading for $13. How will this affect the investor who own s 100 shares of Em ery com mon stock? Now what action wou ld you recomm end to an investor who does not own Em ery com mon stock? | v v 134 | e-Text Main Menu | Textbook Table of Contents | Study Guide Table of Contents...
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