Homework

FIN-516 – WEEK 4 – CHAPTER 20 - HOMEWORK PROBLEMS

Chapter 20 – Problem 20 – 1

The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $300,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price?

At $5 per share :

Sale proceeds = 3000000*5 = $15000000 = $15 m

Amount to Beedles = $14000000 = $14 m

Gross profit of security broker = 15 -14 = $1 m

Expenses of security broker for the issue = $300000= 0.3 m

Net profit of security broker = 1 - 0.3 = 0.7 m = $700000

At $6 per share : 

Sale proceeds = 3000000*6 = $18000000 = $18 m

Amount to Beedles = $14000000= 14 m

Gross profit of security broker = 18 -14 = $4 m

Expenses of security broker for the issue = $300000 = 0.3 m

Net profit of security broker = 4 - 0.3 = 3.7 m= $3700000

At $4 per share :

Sale proceeds = 3000000*4 = $12000000 = 12 m

Amount to Beedles = $14000000 = 14 m

Gross profit of security broker = 12 -14 = -$2 m ( it means loss of 2 m)

Expenses of security broker for the issue = $300000 = $0.3 m

Net profit of security broker = - 2  - 0.3 = - $2.3 m = - $2300000 (means loss of 2300000)    

Chapter 20 – Problem 20 – 2 - Underwriting and Flotation Expenses

The Beranek Company, whose stock price is now $25, needs to raise $20 million in common stock. Underwriters have informed the firm’s management that they must price the new issue to the public at $22 per share because of signaling effects. The underwriters’ compensation will be 5% of the issue price, so Beranek will net $20.90 per share. The firm will also incur expenses in the amount of $150,000.

How many shares must the firm sell to net $20 million after underwriting and flotation expenses?

20,000,000 = 20.90x - 150,000

x = 949,760 shares

Bond Refunding Problem - Thompson Enterprises

Thompson Enterprises has $5,000,000 of bonds outstanding. Each bond has a maturity

value of...