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Chapter 5: 13DQ (page 524)
Explain how the bond refunding problem is similar to a capital budgeting decision. (LO16-3)
The bond refunding and capital budgeting decisions are similar because both focus on the outflow of financial costs and inflow of savings.
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What is the purpose of market stabilization activities during the distribution process?
Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.
d. Should the old issue be refunded with new debt?
What is shelf registration? How does it differ from the traditional requirements for security offerings?
Assume Sybase Software is thinking about three different size offerings for issuance of additional shares.
Size of Offer Public Price Net to Corporation
a. 1.1 million................. \(30 \)27.50
b. 7.0 million鈥︹�︹�︹�︹�� \(30 \)28.44
c. 28.0 million鈥︹�︹�︹�� \(30 \)29.15
What is the percentage underwriting spread for each size offer?
The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows:
In \( millions | In \) millions | ||
Current assets | \(70 | Current liabilities | \)30 |
Fixed assets | \(70 | Long-term liabilities | \)30 |
Total liabilities | \(60 | ||
Stockholder鈥檚 equity | \)80 | ||
Total assets | \(140 | Total stockholder鈥檚 equity and liabilities | \)140 |
The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.
e. In an efficient capital market environment, should the consequences of SFAS No. 13, as viewed in the answers to parts c and d, change stock prices and credit ratings?
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