View the step-by-step solution to:

Question 1 (1 point) Basic Buildings Inc. has decided to go public with a $5,000,000 new equity issue.

Question 1 (1 point)

Basic Buildings Inc. has decided to go public with a $5,000,000 new equity issue. Its investment bankers agreed to take a smaller fee now (6 percent of par value versus 10 percent) in exchange for a 1-year option to purchase an additional 200,000 shares of the company at $5.00 per share. The investment banking firm expects to exercise its option and purchase the 200,000 shares in exactly one year's time when the stock price is expected to be $6.50 per share. However, if the stock price is actually $12.00 per share one year from now, what is the present value of the entire underwriting agreement to the investment banker? Assume that the investment banker's required return on such arrangements is 15 percent and ignore any tax considerations.


Question 3 (1 point)

New York Water
New York Water (NYW) is considering whether to refund a $50 million, 14 percent coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $3 million of flotation costs on the 14 percent bonds over the 30-year life of that issue. NYW's investment bankers have indicated that the company could sell a new 25-year issue at an interest rate of 11.67 percent in today's market. A call premium of 14 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40 percent. The new bonds would be issued at the same time the old bonds were called.


Refer to New York Water. What is the NYW bond refunding's NPV?

a. $5,674,619
b. $ 263,077
c. $3,150,680
d. $2,039,083
e. $3,501,000

Question 4 (1 point)

Machina Corporation is financing an ongoing construction project. The firm needs $8 million of new capital during each of the next three years. The firm has a choice of issuing new debt and equity each year as the funds are needed, or issuing the debt now and the equity later. The firm's capital structure is 40 percent debt and 60 percent equity. Flotation costs for a single debt issue would be 1.6 percent of the gross debt proceeds. Yearly flotation costs for three separate issues of debt would be 3.0 percent of the gross amount. Ignoring time value effects due to timing of the cash flows, what is the absolute difference in dollars saved by raising the needed debt all at once in a single issue rather than in three separate issues?


a. $ 0
b.
c. $140,809
d.
e. $134,400


Question 5 (1 point)

New York Water
New York Water (NYW) is considering whether to refund a $50 million, 14 percent coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $3 million of flotation costs on the 14 percent bonds over the 30-year life of that issue. NYW's investment bankers have indicated that the company could sell a new 25-year issue at an interest rate of 11.67 percent in today's market. A call premium of 14 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40 percent. The new bonds would be issued at the same time the old bonds were called.

Refer to New York Water. What is the relevant refunding investment outlay?

a.
b. -$4,200,000
c. $9,000,000
d. -$5,553,827
e.

Question 6 (1 point)

Schiffauer Electronics plans to issue 10-year zero coupon bonds with a par value of $1000 and a yield to maturity of 9.5 percent. The company has a tax rate of 30 percent. How much extra in taxes would the company pay (or save) the second year (at t = 2) if they go ahead and issue the bonds?


a. Save $12.59
b. Save $13.79
c. Save $41.97
d. No savings
e. Pay $13.79

Question 7 (1 point)

If the firm applies the after-tax cost of marginal debt as the discount rate in analyzing a refunding decision, and the NPV of refunding is positive, the firm should immediately refund the outstanding debt issue and replace it with a cheaper issue.


a. True
b. False

Question 9 (1 point)

New York Water
New York Water (NYW) is considering whether to refund a $50 million, 14 percent coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $3 million of flotation costs on the 14 percent bonds over the 30-year life of that issue. NYW's investment bankers have indicated that the company could sell a new 25-year issue at an interest rate of 11.67 percent in today's market. A call premium of 14 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40 percent. The new bonds would be issued at the same time the old bonds were called.


Refer to New York Water. What are the relevant annual flotation cost tax effects for NYW if refunding takes place?

c. The annual tax effect due to the refunding is the tax effect of the change in amortized floatation costs. $3.0 MM straight line amortized over 25 years is $120,000 per year versus $100,000 per year for the original bond’s $3.0 MM straight line amortization over 30 years. The tax shield affect of the $20,000 difference is $8,000 annually ($20,000 * 40%).

a.
b. $10,000
c. $8,000
d. $15,000
e.

Question 10 (1 point)

The State of Florida issued $2,000,000 of 12 percent coupon, 20-year semiannual payment, tax-exempt bonds 5 years ago. The bonds had 5 years of call protection, but now the state can call the bonds if it chooses to do so. The call premium would be 5 percent of the face amount. Today 15-year, 10 percent, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2 percent, or $40,000. What is the net present value of the refunding?


a. $167,449
b.
c. $205,442
d.
e. -$447,449

Sign up to view the entire interaction

Top Answer

Dear student, please... View the full answer

549490_FIN.doc

Question 1 (1 point)
Basic Buildings Inc. has decided to go public with a $5,000,000 new equity issue. Its
investment bankers agreed to take a smaller fee now (6 percent of par value versus 10...

Sign up to view the full answer

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask a homework question - tutors are online