Advanced Financial Management - Preston University

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Q.4 Johore Trading Company has 2.4 million shaves of common stock outstanding, aird the presentmarket price per share is Rs36. its equity capitalization is as follows;Common stock, Rs2.00 par Rs 4,800,000 .Additional paid-in capital Rs 5,900,000Retained earnings - Rs.87.300.000Shareholders' equityRs.98,000,000REQUIRED. ' . -i. What would happen to these accounts if the company were to declare a 12 percent stockdividend?ii. If, instead, the company declared a 3-for-2 stock split, what would happened to the accounts?What if there is a l-for-4 reverse stock split?Q.5 The stock of National Corporation is selling for $50 per share. The company then issues rights tosubscribe to one new share at $40 for each five rights held.REQUIRED'.i. What is the theoretical value of a right when the stock is selling rights-on?ii. What is the theoretical value of one share of stock when it goes ex-rights?iii. What is the theoretical value of aright when the stock sells ex-rights at $50?Q.6 Crakow Machine Company wishes to borrow $10 million for 10 years. It can issue either a noncallablebonds at interest rate of 11.40 percent p.a or callable bonds at the rate of 12 % p.a. Forsimplicity, assume that the bond will be called only at the end of year 5. The interest rate that islikely to prevail 5 years hence for a 5-year straight bond can be described by the followingprobability distribution:Interest rate9% 10% 11% 12% 13%Probability10% 20% 40% 20% 10%Issuing and other costs involved in selling a bond issue 5 years hence will total $200,000. The callprice is assumed to be par.a. What is the total absolute amount of interest payments for the non-callable issue pver the 10years? (Do not discount.) What is the expected value of total interest payments arid other coststhe company issues callable bonds? (Assume that the company calls the bonds and issues nevones only if there is a savings in interest costs after issuing expenses.) On the basis of totalcosts, should the company issue noncallable bonds or callable bonds?b. Assuming all other conditions the same, what would be the outcome if the probabilityInterest rate 7% 9% 11% 13% 15%Probability 20% 20% 20% 20% 20%Q.7 The common stock of the Draybar Corporation earns $2.50per share, has a dividend payout oftwo/thirds, and sells at aP/B ratio of 16. Draybar wishes to offer $10 million of 9 percent, 20-yearconvertible debentures with an initial conversion premium of 20 percent and a call price of 105.Draybar currently has 1 million common shares outstanding and has a 50 percent tax rate.REQUIRED:i.. What is the conversion price?ii. What is the conversion ratio per $1,000 debenture?iii. What is the initial conversion value of each debenture?iv. How many new shares of common must be issued if all debentures are converted?n,,Page 2 of3
v. If Draybar can increase operating earnings by $1 million per year with the proceeds of thedebenture issue, compute the new earnings per share and earnings retained before and afterconversion.Q.8 D. Sent, a disgruntled stockholder of the Zebec Corporation, desires representation on the board. TheZebec Corporation, which has ] 0 directors, has 1 million shares outstanding.REQUIRED: " /i. How many shares would Sent have to control to be assured of one directorship under a majorityvoting System?ii. Recompute part i, assuming a cumulative voting system.iii. Recompute parts i and ii, assuming the number of directors was reduced to 5.Q.9 LORZO-Perez International has a subsidiary, the DelRay Sorter Company. The company believesthe subsidiary on average will generate $1 million per year in annual net cash flows, after necessarycapital expenditures. These annual net cash flows are projected into the far future {assume infinity).The required rate of return for the subsidiary is 12 percent. If the company were to invest anadditional $10 million now, it is believed that annua! net cash flows could be increased from $1million to $2 million. Exson Corporation has expressed an interest in DelRay, because it is in thesorter business and believes it can achieve some economies. Accordingly, it has made a cash offer ofSlOmillion for the subsidiary.REQUIRED: .Should Loi-zo-Perez(a) Continue th; business as is?(b) Invest the additional SI 0 mil J ion'' (c) Sell' ••the subsidiary to Exson? (Assume the subsidiary is entirely equity financed).Page 3 oi'3
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