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Chapter 5: 4DQ (page 471)
What is a key tax characteristic associated with state and local (municipal) securities?
Local and state securities are exempted from tax.
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Solar Energy Corp. has $4million in earnings with 4 million shares outstanding. Investment bankers think the stock can justify P/E ratio of 21. Assume the underwriting spread is 5 percent. What should the price to the public be?
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.
Todd Winningham IV has \(4,800 to invest. He has been looking at Gallagher Tennis Clubs Inc. common stock. Gallagher has issued a rights offering to its common stockholders. Six rights plus \)48 cash will buy one new share. Gallagher鈥檚 stock is selling for \(66 ex-rights.
b. If Todd invests his \)4,800 in Gallagher rights and the price of Gallagher stock rises to $70 per share ex-rights, what would his dollar profit on the rights be? (First compute profit per right.)
The warrants of Dragon Pet Co. allow the holder to buy a share of stock at \(26.20 and are selling for \)14.10. The stock price is currently $23.50. To what price must the stock go for the warrant purchaser to at least be assured of breaking even?
How might a leveraged buyout eventually lead to high returns for a company?
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