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Chapter 5: 7DQ (page 524)
What is the purpose of serial repayments and sinking funds? (LO16-1)
The purpose of serial payments is to make payments in installments, whereas sinking funds keep aside the funds to retire the debts.
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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?
What is a key tax characteristic associated with state and local (municipal) securities?
Question: I. B. Michaels has a chance to participate in a new public offering by Hi-Tech Micro Computers. His broker informs him that demand for the 700,000 shares to be issued is very strong. His broker鈥檚 firm is assigned 25,000 shares in the distribution and will allow Michaels, a relatively good customer, 1.3 percent of its 25,000-share allocation. The initial offering price is \(30 per share. There is a strong aftermarket, and the stock goes to \)32 one week after issue. The first full month after issue, Mr. Michaels is pleased to observe his shares are selling for \(33.50. He is content to place his shares in a lockbox and eventually use their anticipated increased value to help send his son to college many years in the future. However, one year after the distribution, he looks up the shares in The Wall Street Journal and finds they are trading at \)28.50.
a. Compute the total dollar profit or loss on Mr. Michaels鈥檚 shares one week, one month, and one year after the purchase. In each case, compute the profit or loss against the initial purchase price.
The Omega Corporation has some excess cash that it would like to invest in marketable securities for a long-term hold. Its vice president of finance is considering three investments (Omega Corporation is in a 35 percent tax bracket and the tax rate on dividends is 20 percent). Which one should she select based on aftertax return: (a) Treasury bonds at a 10 percent yield; (b) corporate bonds at a 13 percent yield; or (c) preferred stock at an 11 percent yield?
Question:Cox Media Corporation pays an 11 percent coupon rate on debentures that are due in 10 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,110. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds.
a. Find the market value of the bonds using semiannual analysis.
b. Do you think the bonds will sell for the price you arrived at in part a? Why?
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