8. value: 1.00 points American Health Systems currently has 6,400,000 shares of stock outstanding and will report earnings of $13 million in the current year. The company is considering the issuance of 1,500,000 additional shares that will net $60 per share to the corporation. a. What is the immediate dilution potential for this new stock issue? (Do not round intermediate calculations and round your answer to 2 decimal places.)   Dilution $  per share   b-1. Assume that American Health Systems can earn 8 percent on the proceeds of the stock issue in time to include them in the current year’s results. Calculate earnings per share. (Do not round intermediate calculations and round your answer to 2 decimal places.)   Earnings per share $    b-2. Should the new issue be undertaken based on earnings per share? Yes No 9. value: 1.00 points Assume Sybase Software is thinking about three different size offerings for issuance of additional shares.          Size of Offer Public Price Net to Corporation    a. $ 2.4   million $ 46 $ 42.60    b. 7.0   million 46 43.20    c. 28.0   million 46 43.50 What is the percentage underwriting spread for each size offer? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Size of Offer     Underwriting Spread   a. $2.4 million  %     b. $7.0 million  %     c. $28.0 million  %   0. value: 2.00 points The Wrigley Corporation needs to raise $35 million. The investment banking firm of Tinkers, Evers, & Chance will handle the transaction. a. If stock is utilized, 2,200,000 shares will be sold to the public at $17.20 per share. The corporation will receive a net price of $16.00 per share. What is the percentage underwriting spread per share?(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)   Underwriting spread per share  %   b. If bonds are utilized, slightly over 35,200 bonds will be sold to the public at $1,006 per bond. The corporation will receive a net price of $993 per bond. What is the percentage of underwriting spread per bond? (Relate the dollar spread to the public price.) (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)   Underwriting spread per bond  %   c-1. Which alternative has the larger percentage of spread? Stock Bond c-2. Is this the normal relationship between the two types of issues? Yes No 11. value: 2.00 points Kevin’s Bacon Company Inc. has earnings of $5 million with 2,400,000 shares outstanding before a public distribution. Five hundred thousand shares will be included in the sale, of which 300,000 are new corporate shares, and 200,000 are shares currently owned by Ann Fry, the founder and CEO. The 200,000 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 $18.50 and the corporate proceeds a.

1. 8.
value:
1.00 points
American Health Systems currently has 6,400,000 shares of
stock outstanding and will report earnings of $13 million in the
current year. The company is considering the issuance of
1,500,000 additional shares that will net $60 per share to the
corporation.
a.
What is the immediate dilution potential for this new stock
issue? (Do not round intermediate calculations and round your
answer to 2 decimal places.)
Dilution
$ per share
b-1.
Assume that American Health Systems can earn 8 percent on the
proceeds of the stock issue in time to include them in the
current year’s results. Calculate earnings per share. (Do not
round intermediate calculations and round your answer to 2
decimal places.)
Earnings per share
$
b-2.
Should the new issue be undertaken based on earnings per
share?

2. Yes
No
9.
value:
1.00 points
Assume Sybase Software is thinking about three different size
offerings for issuance of additional shares.
Size of Offer
Public Price
Net to Corporation
a.
$
2.4
million
$
46
$
42.60
b.
7.0
million
46

3. 43.20
c.
28.0
million
46
43.50
What is the percentage underwriting spread for each size
offer? (Do not round intermediate calculations. Enter your
answers as a percent rounded to 2 decimal places.)
Size of Offer
Underwriting Spread
a.
$2.4 million
%
b.
$7.0 million
%
c.
$28.0 million
%

4. 0.
value:
2.00 points
The Wrigley Corporation needs to raise $35 million. The
investment banking firm of Tinkers, Evers, & Chance will
handle the transaction.
a.
If stock is utilized, 2,200,000 shares will be sold to the public
at $17.20 per share. The corporation will receive a net price of
$16.00 per share. What is the percentage underwriting spread
per share?(Do not round intermediate calculations. Enter your
answer as a percent rounded to 2 decimal places.)
Underwriting spread per share
%
b.
If bonds are utilized, slightly over 35,200 bonds will be sold to
the public at $1,006 per bond. The corporation will receive a net
price of $993 per bond. What is the percentage of underwriting
spread per bond? (Relate the dollar spread to the public
price.) (Do not round intermediate calculations. Enter your
answer as a percent rounded to 2 decimal places.)
Underwriting spread per bond
%
c-1.
Which alternative has the larger percentage of spread?
Stock

5. Bond
c-2.
Is this the normal relationship between the two types of issues?
Yes
No
11.
value:
2.00 points
Kevin’s Bacon Company Inc. has earnings of $5 million with
2,400,000 shares outstanding before a public distribution. Five
hundred thousand shares will be included in the sale, of which
300,000 are new corporate shares, and 200,000 are shares
currently owned by Ann Fry, the founder and CEO. The 200,000
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 $18.50 and the
corporate proceeds are expected to produce $1.7 million in
corporate earnings.
a.
What were the corporation’s earnings per share before the
offering? (Do not round intermediate calculations and round
your answer to 2 decimal places.)
Earnings per share

6. $
b.
What are the corporation’s earnings per share expected to be
after the offering? (Do not round intermediate calculations and
round your answer to 2 decimal places.)
Earnings per share
$
13.
value:
2.00 points
The investment banking firm of Einstein & Co. will use a
dividend valuation model to appraise the shares of the Modern
Physics Corporation. Dividends (D1) at the end of the current
year will be $1.50. The growth rate (g) is 7 percent and the
discount rate (Ke) is 10 percent.
a.
What should be the price of the stock to the public? (Do not
round intermediate calculations and round your answer to 2
decimal places.)
Price of the stock
$
b.
If there is a 6 percent total underwriting spread on the stock,
how much will the issuing corporation receive? (Do not round
intermediate calculations and round your answer to 2 decimal
places.)

7. Net price to the corporation
$
c.
If the issuing corporation requires a net price of $48.50
(proceeds to the corporation) and there is a 6 percent
underwriting spread, what should be the price of the stock to the
public? (Do not round intermediate calculations and round your
answer to 2 decimal places.)
Necessary public price
$
14.
value:
3.00 points
The Landers Corporation needs to raise $1.20 million of debt on
a 5-year issue. If it places the bonds privately, the interest rate
will be 8 percent. Twenty thousand dollars in out-of-pocket
costs will be incurred. For a public issue, the interest rate will
be 8 percent, and the underwriting spread will be 5 percent.
There will be $100,000 in out-of-pocket costs. Assume interest
on the debt is paid semiannually, and the debt will be
outstanding for the full 5-year period, at which time it will be
repaid. Use Appendix B and Appendix Dfor an approximate
answer but calculate your final answer using the formula and
financial calculator methods.
a.
For each plan, compare the net amount of funds initially
available—inflow—to the present value of future payments of
interest and principal to determine net present value. Assume
the stated discount rate is 12 percent annually. Use 6.00 percent
semiannually throughout the analysis. (Disregard

8. taxes.)(Assume the $1.20 million needed includes the
underwriting costs. Input your present value of future payments
answers as negative values. Do not round intermediate
calculations and round your answers to 2 decimal places.)
Private Placement
Public Issue
Net amount to Landers
$
$
Present value of future payments
Net present value
$
$
b.
Which plan offers the higher net present value?
Private placement
Public issue

9. Hint #1
15.
value:
2.00 points
The Presley Corporation is about to go public. It currently has
aftertax earnings of $6,900,000, and 3,200,000 shares are owned
by the present stockholders (the Presley family). The new
public issue will represent 500,000 new shares. The new shares
will be priced to the public at $15 per share, with a 6 percent
spread on the offering price. There will also be $270,000 in out-
of-pocket costs to the corporation.
a.
Compute the net proceeds to the Presley Corporation. (Do not
round intermediate calculations and round your answer to the
nearest whole dollar.)
Net proceeds
$
b.
Compute the earnings per share immediately before the stock
issue. (Do not round intermediate calculations and round your
answer to 2 decimal places.)
Earnings per share
$
c.
Compute the earnings per share immediately after the stock
issue. (Do not round intermediate calculations and round your
answer to 2 decimal places.)

10. Earnings per share
$
d.
Determine what rate of return must be earned on the net
proceeds to the corporation so there will not be a dilution in
earnings per share during the year of going public. (Do not
round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places.)
Rate of return
%
e.
Determine what rate of return must be earned on the proceeds to
the corporation so there will be a 5 percent increase in earnings
per share during the year of going public. (Do not round
intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places.)
Rate of return
%
16.
value:
2.00 points
The management of Mitchell Labs decided to go private in 2002
by buying all 2.50 million of its outstanding shares at $19.50
per share. By 2006, management had restructured the company
by selling off the petroleum research division for $14.80
million, the fiber technology division for $8.65 million, and the
synthetic products division for $22 million. Because these
divisions had been only marginally profitable, Mitchell Labs is

11. a stronger company after the restructuring. Mitchell is now able
to concentrate exclusively on contract research and will
generate earnings per share of $1.35 this year. Investment
bankers have contacted the firm and indicated that if it
reentered the public market, the 2.50 million shares it purchased
to go private could now be reissued to the public at a P/E ratio
of 14 times earnings per share.
a.
What was the initial cost to Mitchell Labs to go private? (Do
not round intermediate calculations. Round your answer to 2
decimal places. Enter your answer in millions, not dollars (e.g.,
$1,230,000 should be entered as "1.23").)
Initial cost
$ million
b.
What is the total value to the company from (1) the proceeds of
the divisions that were sold, as well as (2) the current value of
the 2.50 million shares (based on current earnings and an
anticipated P/E of 14)? (Do not round intermediate calculations.
Round your answer to 2 decimal places. Enter your answer in
millions, not dollars (e.g., $1,230,000 should be entered as
"1.23").)
Total value to the company
$ million
c.
What is the percentage return to the management of Mitchell
Labs from the restructuring? Use answers from parts a and b to
determine this value. (Do not round intermediate calculations.
Enter your answer as a percent rounded to 2 decimal places.)
Percentage return

12. %
17.
value:
2.00 points
Preston Corporation has a bond outstanding with an annual
interest payment of $80, a market price of $1,270, and a
maturity date in 9 years. Assume the par value of the bond is
$1,000.
Find the following: (Use the approximation formula to compute
the approximate yield to maturity and use the calculator method
to compute the exact yield to maturity. Do not round
intermediate calculations. Input your answers as a percent
rounded to 2 decimal places.)
a. Coupon rate
%
b. Current yield
%
c-1. Approximate yield to maturity
%
c-2. Exact yield to maturity
%
18.
value:
2.00 points
A 15-year, $1,000 par value zero-coupon rate bond is to be
issued to yield 9 percent. Use Appendix B for an approximate
answer but calculate your final answer using the formula and

13. financial calculator methods.
a.
What should be the initial price of the bond? (Assume annual
compounding. Do not round intermediate calculations and round
your answer to 2 decimal places.)
Bond price
$
b.
If immediately upon issue, interest rates dropped to 8 percent,
what would be the value of the zero-coupon rate bond? (Assume
annual compounding. Do not round intermediate calculations
and round your answer to 2 decimal places.)
Bond price
$
c.
If immediately upon issue, interest rates increased to 11
percent, what would be the value of the zero-coupon rate
bond? (Assume annual compounding. Do not round intermediate
calculations and round your answer to 2 decimal places.)
Bond price
$
19.
value:
2.00 points
Assume a zero-coupon bond that sells for $403 will mature in
10 years at $1,250. Use Appendix B for an approximate answer
but calculate your final answer using the formula and financial

14. calculator methods.
What is the effective yield to maturity? (Assume annual
compounding. Do not round intermediate calculations. Enter
your answer as a percent rounded to 2 decimal places.)
Effective yield to maturity
%
20.
value:
1.00 points
You buy a 6 percent, 15-year, $1,000 par value floating rate
bond in 1999. By the year 2014, rates on bonds of similar risk
are up to 8 percent.
What is your one best guess as to the value of the bond?
Value of the bond
$
21.
value:
1.00 points
Seventeen years ago, the Archer Corporation borrowed
$6,450,000. Since then, cumulative inflation has been 95
percent (a compound rate of approximately 4 percent per year).
a.
When the firm repays the original $6,450,000 loan this year,

15. what will be the effective purchasing power of the $6,450,000?
(Hint: Divide the loan amount by one plus cumulative
inflation.) (Do not round intermediate calculations and round
your answer to the nearest whole dollar.)
Effective purchasing power
$
b.
To maintain the original $6,450,000 purchasing power, how
much should the lender be repaid? (Hint: Multiply the loan
amount by one plus cumulative inflation.) (Do not round
intermediate calculations and round your answer to the nearest
whole dollar.)
Loan repayment
$
22.
value:
2.00 points
A $1,000 par value bond was issued 25 years ago at a 12 percent
coupon rate. It currently has 15 years remaining to maturity.
Interest rates on similar obligations are now 10 percent. Assume
Ms. Bright bought the bond three years ago when it had a price
of $1,010. Further assume Ms. Bright paid 40 percent of the
purchase price in cash and borrowed the rest (known as buying
on margin). She used the interest payments from the bond to
cover the interest costs on the loan.
a.
What is the current price of the bond? Use Table 16-2. (Input
your answer to 2 decimal places.)
Price of the bond

16. $
b.
What is her dollar profit based on the bond’s current price? (Do
not round intermediate calculations and round your answer to 2
decimal places.)
Dollar profit
$
c.
How much of the purchase price of $1,010 did Ms. Bright pay in
cash? (Do not round intermediate calculations and round your
answer to 2 decimal places.)
Purchase price paid in cash
$
d.
What is Ms. Bright’s percentage return on her cash investment?
Divide the answer to part b by the answer to part c. (Do not
round intermediate calculations. Input your answer as a percent
rounded to 2 decimal places.)
Percentage return
%
23.
value:
3.00 points
A $1,000 par value bond was issued five years ago at a coupon
rate of 10 percent. It currently has 10 years remaining to

17. maturity. Interest rates on similar debt obligations are now 12
percent. Use Appendix Band Appendix D for an approximate
answer but calculate your final answer using the formula and
financial calculator methods.
a.
Compute the current price of the bond using an assumption of
semiannual payments. (Do not round intermediate calculations
and round your answer to 2 decimal places.)
Current bond price
$
b.
If Mr. Robinson initially bought the bond at par value, what is
his percentage capital gain or loss?(Ignore any interest income
received. Do not round intermediate calculations and input the
amount as a positive percent rounded to 2 decimal places.)
Percentage
%
c.
Now assume Mrs. Pinson buys the bond at its current market
value and holds it to maturity, what will be her percentage
capital gain or loss? (Ignore any interest income received. Do
not round intermediate calculations and input the amount as a
positive percent rounded to 2 decimal places.)
Percentage
%
d.
Why is the percentage gain larger than the percentage loss when

18. the same dollar amounts are involved in parts b and c?
The percentage gain is larger than the percentage loss because
the investment is larger.
The percentage gain is larger than the percentage loss because
the investment is smaller.
24.
value:
4.00 points
The Ellis Corporation has heavy lease commitments. Prior
to SFAS No. 13, it merely footnoted lease obligations in the
balance sheet, which appeared as follows: Use Appendix D for
an approximate answer but calculate your final answer using the
formula and financial calculator methods.
In $ millions
In $ millions
Current assets
$ 60
Current liabilities
$ 15
Fixed assets
60
Long-term liabilities
40

19. Total liabilities
$ 55
Stockholders' equity
65
Total assets
$ 120
Total liabilities and
stockholders' equity
$ 120

20. The footnotes stated that the company had $30 million in annual
capital lease obligations for the next 25 years.
a.
Discount these annual lease obligations back to the present at a
12 percent discount rate. (Do not round intermediate
calculations. Round your answer to the nearest million. Input
your answer in millions of dollars (e.g., $6,100,000 should be
input as "6").)
PV of lease obligations
$ million
b.
Construct a revised balance sheet that includes lease
obligations. (Do not round intermediate calculations. Round
your answers to the nearest million. Input your answer in
millions of dollars (e.g., $6,100,000 should be input as "6").)
Balance Sheet (In $ millions)
Current assets
$
Current liabilities
$
Fixed assets
Long-term liabilities
Leased property
under capital lease
Obligations under
capital lease

21. Total liabilities
$
Stockholders' equity
Total assets
$
Total liabilities and
Stockholders' equity
$
c.
Compute the total debt to total asset ratio for the original and
revised balance sheets. (Input your answers as a percent
rounded to 2 decimal places.)

22. Original
%
Revised
%
d.
Compute the total debt to total equity ratio for the original and
revised balance sheets. (Input your answers as a percent
rounded to 2 decimal places.)
Original
%
Revised
%
e.
In an efficient capital market environment, should the
consequences of SFAS No. 13, as viewed in the answers to
parts c and d, change stock prices and credit ratings?
Yes
No
25.
value:
4.00 points

23. The Hardaway Corporation plans to lease a $810,000 asset to
the O’Neil Corporation. The lease will be for 11 years.
Use Appendix D for an approximate answer but calculate your
final answer using the formula and financial calculator methods.
a.
If the Hardaway Corporation desires a return of 13 percent on
its investment, how much should the lease payments be? (Do
not round intermediate calculations and round your answer to 2
decimal places.)
Lease payment
$
b.
If the Hardaway Corporation is able to take a 10 percent
deduction from the purchase price of $810,000 and will pass the
benefits along to the O’Neil Corporation in the form of lower
lease payments (related to the Hardaway Corporation in the
form of lower initial net cost), how much should the revised
lease payments be? The Hardaway Corporation desires a return
of 13 percent on the 11-year lease. (Do not round intermediate
calculations and round your answer to 2 decimal places.)
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