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Chapter 5: 9DQ (page 524)
Discuss the relationship between bond prices and interest rates. What impact do changing interest rates have on the price of long-term bonds versus short-term bonds? (LO16-2)
The bond prices and interest rates have an inverse relationship. When prices of bonds increase, the interest rates go down.
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Discuss how an underwriting syndicate decreases risk for each underwriter and at the same time facilitates the distribution process.
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.
The Hastings Sugar Corporation has the following pattern of net income each year and associated capital expenditure projects. The firm can earn a higher return on the projects than the stockholders could earn if the funds were paid out in the form of dividends.
Year | Net income | Profitable capital expenditure |
1 | \(14 million | \)7 million |
2 | \(16 million | \)11 million |
3 | \(12 million | \)6 million |
4 | \(16 million | \)8 million |
5 | \(16 million | \)9 million |
The Hastings Corporation has 3 million shares outstanding. (The following questions are separate from each other.)
a. If the marginal principle of retained earnings is applied, how much in total cash dividends will be paid over the five years?
b. If the firm simply uses a payout ratio of 30 percent of net income, how much in total cash dividends will be paid?
c. If the firm pays a 10 percent stock dividend in years 2 through 5, and also pays a cash dividend of $3.40 per share for each of the five years, how much in total dividends will be paid?
d. Assume the payout ratio in each year is to be 20 percent of the net income and the firm will pay a 10 percent stock dividend in years 2 through 5, how much will dividends per share for each year be? (Assume the cash dividend is paid after the stock dividend.)
Question:Twenty-five-year B-rated bonds of Parker Optical Company were initially issued at a 12 percent yield. After 10 years the bonds have been upgraded to Aa2. Such bonds are currently yielding 10 percent to maturity. Use Table 16-2 to determine the price of the bonds with 15 years remaining to maturity. (You do not need the bond ratings to enter the table; just use the basic facts of the problem.)
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?
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