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Chapter 5: 12DQ (page 471)
What was the primary purpose of the Securities Act of 1933?
The primary purpose of the Securities Act 1933 was to disclose the full information associated with the new issue of securities.
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A \(1,000 par value bond was issued 25 years ago at a 12 percent coupon rate. It currently has 15 years remaining to maturity. Interest rates on similar obligations are now 8 percent.
a. What is the current price of the bond? (Look up the answer in Table 16-2.)
b. Assume Ms. Bright bought the bond three years ago when it had a price of \)1,050. What is her dollar profit based on the bond鈥檚 current price?
c. Further assume Ms. Bright paid 30 percent of the purchase price in cash and borrowed the rest (known as buying on margin). She used the interest payments from the bond to cover the interest costs on the loan. How much of the purchase price of $1,050 did Ms. Bright pay in cash?
d. What is Ms. Bright鈥檚 percentage return on her cash investment? Divide the answer to part b by the answer to part c.
e. Explain why her return is so high.
What is the purpose of market stabilization activities during the distribution process?
The investment banking firm of Einstein & Co. will use a dividend valuation model to appraise the shares of the Modern Physics Corporation. Dividends (D1) at the end of the current year will be \(1.64. The growth rate (g) is 8 percent and the discount rate (Ke) is 13 percent.
a. What should be the price of the stock to the public?
b. If there is a 7 percent total underwriting spread on the stock, how much will the issuing corporation receive?
c. If the issuing corporation requires a net price of \)31.30 (proceeds to the corporation) and there is a 7 percent underwriting spread, what should be the price of the stock to the public? (Round to two places to the right of the decimal point.)
An investor must choose between two bonds: Bond A pays \(72 annual interest and has a market value of \)925. It has 10 years to maturity. Bond B pays \(62annual interest and has a market value of \)910. It has two years to maturity.
Assume the par value of the bonds is $1,000.
a.Compute the current yield on both bonds.
b.Which bond should she select based on your answer to part a?
c.A drawback of current yield is that it does not consider the total life of thebond. For example, the yield to maturity on Bond A is 8.33 percent. What isthe yield to maturity on Bond B?
d.Has your answer changed between parts band cof this question in terms ofwhich bond to select?
The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for \(6 per share.
Common stock (50,000 shares at \)2 par) | \(100,000 |
Capital in excess of par | \)100,000 |
Retained earnings | \(250,000 |
\)450,000 |
The firm intends to first declare a 15 percent stock dividend and then pay a 25-cent cash dividend (which also causes a reduction of retained earnings). Show the capital section of the balance sheet after the first transaction and then after the second transaction.
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