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Chapter 5: Q12DQ (page 622)
Suggest two areas where the use of futures contracts is most common. What percentage of the value of the underlying security is typical as a down payment in a futures contract?
Futures contracts are most common for especially government bonds; commodities and interest rate securities.
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Becker Brothers is the managing underwriter for a 1.45-millon-share issue by Jay鈥檚 Hamburger Heaven. Becker Brothers is 鈥渉andling鈥� 10 percent of the issue. Its price is \(27 per share, and the price to the public is \)28.95.
Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 50,000 shares in the open market at an average price of \(27.50. It later sells the shares at an average value of \)27.20.
Compute Becker Brother鈥檚 overall gain or loss from managing the issue.
What are three forms of corporate securities discussed in the chapter?
Bonds of different risk classes will have a spread between their interest rates. Is this spread always the same? Why? (LO16-2)
Kevin鈥檚 Bacon Company Inc. has earnings of \(9 million with 2,100,000 shares outstanding before a public distribution. Seven hundred thousand shares will be included in the sale, of which 400,000 are new corporate shares, and 300,000 are shares currently owned by Ann Fry, the founder and CEO. The 300,000 shares that Ann is selling are referred to as a secondary offering, and all proceeds will go to her.
The net price from the offering will be \)16.50, and the corporate proceeds are expected to produce $1.8 million in corporate earnings.
a. What were the corporation鈥檚 earnings per share before the offering?
b. What are the corporation鈥檚 earnings per share expected to be after the offering?
Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.
b. Compute the earnings per share immediately before the stock issue.
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