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Bankruptcies

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Q. 1 We Do Bankruptcies is a law firm that specializes in providing advice to

firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, −0.2.

a. Suppose you invested 70% of your wealth in the market portfolio and the remainder of your wealth in the shares in the law firm. What would be the beta of your portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 
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Caterpillar Inc.

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Q.1 In 2015, Caterpillar Inc. had about 652 million shares outstanding. Their

book value was $31.3 per share, and the market price was $73.50 per share. The company’s balance sheet shows that the company had $21.20 billion of long-term debt, which was currently selling near par value.

a. What was Caterpillar’s book debt-to-value ratio? (Do not round intermediate calculations. Enter your answer as a decimal rounded to 2 decimal places.)

b. What was its market debt-to-value ratio? (Do not round intermediate calculations. Enter your answer as a decimal rounded to 2 decimal places.)

Q.2 Pangbourne Whitchurch has preferred stock outstanding. The stock pays a dividend of $6 per share, and sells for $30. The corporate tax rate is 35%. What is the percentage cost of the preferred stock? (Enter your answer as a whole percent.)

Q.3 Reactive Power Generation has the following capital structure. Its corporate tax rate is 20%.

Security                    Market Value              Required Rate

                                                                          of Return

Debt                              $ 20million                        4%

Preferred stock               30million                        6             

Common stock                 50million                       10          

What is its WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

 
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The shareholders of the Pickwick Paper Company

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1.  The shareholders of the Pickwick Paper Company need to elect ten

directors. There are 300,000 shares outstanding.

     a. What is the minimum number of shares you need to own to ensure that you can elect at least one director if the company has majority voting?

b. What is the minimum number of shares you need to own to ensure that you can elect at least one director if the company has cumulative voting? (Round your answer

to the nearest whole number.)

2. If there are 7 directors to be elected and a shareholder owns 100 shares, calculate the maximum number of votes that he or she can cast for a favorite candidate under each of the voting methods.

Maximum no of votes

a. majority voting ——-

b. cumulative voting ——-

3. Common Products has just made its first issue of stock. It raised $1.8 million by selling 100,000 shares of stock to the public. These are the only shares outstanding. The par value of each share was $2. Complete the following table:

Common stock (par value) ——-

Additional paid-in capital ——-

Retained earnings ——-

Net common equity                     $2,000,000

 
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The authorized share capital of the Alfred Cake

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1.  The authorized share capital of the Alfred Cake Company is 110,000

shares. The equity is currently shown in the company’s books as follows:

Common stock ($2 par value)       $73,000

Additional paid-in capital                23,000

Retained earnings                          43,000

Common equity                              $139,000

Treasury stock (2,000 shares)          17,000

Net common equity                        $122,000

a. How many shares are issued?

b. How many shares are outstanding?

c. How many more shares can be issued without the approval of shareholders?

2. Moonscape has just completed an initial public offering. The firm sold 6 million shares at an offer price of $6 per share. The underwriting spread was $0.40 a share. The price of the stock closed at $9.00 per share at the end of the first day of trading. The firm incurred $100,000 in legal, administrative, and other costs. What were flotation costs as a fraction of funds raised? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Costs as percent of fund raised ———–%

3. Young Corporation stock currently sells for $40 per share. There are 1 million shares currently outstanding. The company announces plans to raise $4 million by offering shares to the public at a price of $40 per share.

a. If the underwriting spread is 5%, how many shares will the company need to issue in order to be left with net proceeds (before other administrative costs) of $4 million? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

b. If other administrative costs are $70,000, what is the dollar value of the total direct costs of the issue? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

c. If the share price falls by 3% at the announcement of the plans to proceed with a seasoned offering, what is the dollar cost of the announcement effect? (Enter your answer in dollars not in millions.)

 
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