Financial Management
Show all the work clearly and legibly. Otherwise, I cannot give you full credit.
Answer the questions based on the table below.
Cash Dividend
Stock Repurchases
Stock Dividend
Value of Operations
$900,000,000
$900,000,000
$900,000,000
Value of Cash balance
80,000,000
80,000,000
80,000,000
Total value of firm
$980,000,000
$980,000,000
$980,000,000
− Debt
100,000,000
100,000,000
100,000,000
− Preferred stock
80,000,000
80,000,000
80,000,000
Value of equity
$800,000,000
$800,000,000
$800,000,000
# of shares Before the event
40,000,000
40,000,000
40,000,000
Stock price Before the event
$20
$20
$20
# of shares After the event
( )
( )
( )
Stock price After the event
( )
( )
( )
The firm considers cash dividend using the cash balance of $80,000,000.
Figure out the dividend per share. (15points)
Once the cash dividend is completed, figure out the stock price. (15points)
The firm considers stock repurchase using the cash balance of $80,000,000.
Figure out how many shares this firm can repurchase. (15points)
Once the stock repurchase is completed, figure out the stock price. (20points)
The firm considers a 25% stock dividend.
Figure out how many new shares this firm can issue. (15points)
Once the stock dividend is completed, figure out the stock price. (20points)
Answer the questions based on the table below.
Before rights offering
After rights offering
Value of equity
$200,000,000
( )
# of shares
10,000,000
( )
Stock price
$20
( )
New equity capital raised
$40,000,000
Subscription price
$10
# of new shares
( )
# of rights
( )
Conversion ratio for a right to a new share
( )
Value of a right
( )
Figure out the number of new shares issued given the subscription price. (25points)
Figure out the conversion ratio for rights to a new share. (25points)
Figure out the stock price after the rights offering. (30points)
Figure out the value of a right. (20points)
Firm A tries to acquire Firm B. Assume that both firms have no debt outstanding. Firm A estimates that the value of synergistic benefits from Firm B is $10,000,000.
Firm A
Firm B
Firm AB
Cash acquisition
Stock acquisition
Earnings
$5,000,000
$1,000,000
$6,000,000
$6,000,000
Stock price
$40
$20
$ ( )
$ ( )
# of shares
1,000,000
500,000
1,000,000
( )
Supposed Firm A tries to acquire Firm B for $30 per share in cash.
Figure out the NPV of the merger. (20points)
Figure out the stock price of the merged firm. (20points)
Suppose Firm B prefers stock acquisition instead of cash acquisition of $30 per share. If Firm A offers one share for every two of Firm B’s shares.
Figure out the number of stocks and the stock price of the merged firm. (20points)
Figure out the NPV of the merged firm.(20points)
Figure out the share exchange ratio of Firm A to Firm B where the shareholders of Firm B are indifferent between cash acquisition and stock acquisition. (20points)
Answer the questions.
With Dutch auction underwriting, all successful bidders pay the same price per share. (15points)
True
False
Underpricing is the difference between the underwriters’ cost of buying shares and the offering price of those securities to the public. (15points)
True
False
According to Green Shoe provision, underwriters can purchase additional shares at a lower price than the offering price to cover excess demand. (15points)
True
False
Stock repurchase may send a negative signal that a firm does not have any profitable investment opportunities. (15points)
True
False
According to Dividend preference theory, higher payout leads to lower agency costs, thereby resulting in higher stock price. (15points)
True
False
Employee stock options (ESO)s are “out-of-the money” when they are issued. (15points)
True
False
Employee stock options (ESO) backdating is a practice of selecting a grant date on which the stock price is low. Therefore, this practice is illegal or unethical. (15points)
True
False
In convertible bonds, conversion premium is the difference between conversion price and bond price, divided by bond price. (15points)
True
False
Stock warrants are long-maturity call options like ESO, while they are listed and traded on the exchange unlike ESO. (15points)
True
False
If managers ignore real options such as option to wait, they could underestimate the NPV of a project. (15points)
True
False
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