Da ?tobUr'\ JrL+-, )^ tlCeLDog
Bankruptcy, Reorganization, anti Liquidation
b. After distribution to general crefitors and subordination adjustments are made, how
much of the proceeds are received by the second-mortgage holders? By holders of
the notes payable? By the subordinated debentures? By the common stockholders?
Chapter 24
Subordinated debentures
Total debt
Common equity
Total assets
The trustee's costs total $281,250, and the firm has no accrued taxes or wages. The
debentures are subordinated only to the notes payable. If the firm goes bankrupt and
liquidates, how much will each class of investors receive if a total of $2.5 million is
received from sale ofthe assets?
The Verbrugge Publishing Company's 2012 balance sheet and statement are as
Reorganization follows (in miliions of dollars):
ce Sheet
Current
Intermediate
Problenr 2
Southwestern Wear Inc. has the following balance sheet:
Current assets
Fixed assets
Net fixed
Goodwill
$1,875,000 Accounts payabie
1,875,000 Notes payable
&,759,gqq Total liabilities and equity
$ 37s,000
750,000
750,000
$1,875,000
1,875,000
$ulgqqq
$+z
78
6
135
9
9
$168
153
15
Current
Advance
stock, $112.50 par value
,200,000 shares)
$10.50 preferred stoch no par, callable
at $150 (60,000 shares)
Common stoch $1.50 par value
shares)
Ret earnings
Total assets Total
Income S
Net
expense
operating income
income
EBT
Taxes (50%)
Net income
Dividends on $6 preferred
Dividends on $10.50 preferred
Income available to common stockholders
57
$33€$336
$540.0
516.0
$ 24.0
3.0
$ 27.0
13.5
$ l3.s
7.2
0.6
$_s3
a
Chapter
Wn 2)-l ? )2'2,- t',
&o k903t22 Mergers and Corporate Control
(sr-1)
Valuation
Red Valley is considering an acquisition of Flagg Markets' Fiagg currently has a cost
of equity of 10%; of its financing is in the form of and the rest is in common
equity. Its federal-plus: tax rate is 407o. uisition, Red Vailey expects Flagg to
have the following FCFs the next 3 years (in millions):
Year 2 Year 3
$10.00 $20.00 $2s.00
24.00 20.28
Year 1
exPense
After the free cash flows are expected to at a constant rate of 5D/a, and the capital
will stabilize at 35o/o debt with an rate of 7o/o.
'u. Wtrut is Flagg's unlevered cost of equity? What its levered cost of equity and cost of
capital for the post-horizon period?
b. Uiing the adjusted present value approach, what is Flagg's value of operations to Red Valley?
Easy Problem 1
,,R
Intermediate
' Problems 2-3
,"rr*,rrl,
The fotlowing infonnation is required to work Problems 22-1 through
22-4'
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1
million shares outstanding and a target capitai structure consisting csf 30o/o debt. Yandell's
debt interest rate is 8%. Assume that the risk-free rate of interest is 5% and the market risk
premium is 6%. Both Vandell and Hastings face a 40oio tax rate.
Vandell's free cash flotv (FCFo) is $2 million per year and is expected .
Da tobUr JrL+-, )^ tlCeLDogBankruptcy, Reorganization, an.docx
1. Da ?tobUr' JrL+-, )^ tlCeLDog
Bankruptcy, Reorganization, anti Liquidation
b. After distribution to general crefitors and subordination
adjustments are made, how
much of the proceeds are received by the second-mortgage
holders? By holders of
the notes payable? By the subordinated debentures? By the
common stockholders?
Chapter 24
Subordinated debentures
Total debt
Common equity
Total assets
The trustee's costs total $281,250, and the firm has no accrued
taxes or wages. The
debentures are subordinated only to the notes payable. If the
firm goes bankrupt and
liquidates, how much will each class of investors receive if a
total of $2.5 million is
received from sale ofthe assets?
The Verbrugge Publishing Company's 2012 balance sheet and
statement are as
Reorganization follows (in miliions of dollars):
2. ce Sheet
Current
Intermediate
Problenr 2
Southwestern Wear Inc. has the following balance sheet:
Current assets
Fixed assets
Net fixed
Goodwill
$1,875,000 Accounts payabie
1,875,000 Notes payable
&,759,gqq Total liabilities and equity
$ 37s,000
750,000
750,000
$1,875,000
1,875,000
$ulgqqq
$+z
78
6
3. 135
9
9
$168
153
15
Current
Advance
stock, $112.50 par value
,200,000 shares)
$10.50 preferred stoch no par, callable
at $150 (60,000 shares)
Common stoch $1.50 par value
shares)
Ret earnings
Total assets Total
Income S
Net
expense
operating income
4. income
EBT
Taxes (50%)
Net income
Dividends on $6 preferred
Dividends on $10.50 preferred
Income available to common stockholders
57
$33€$336
$540.0
516.0
$ 24.0
3.0
$ 27.0
13.5
$ l3.s
7.2
0.6
$_s3
5. a
Chapter
Wn 2)-l ? )2'2,- t',
&o k903t22 Mergers and Corporate Control
(sr-1)
Valuation
Red Valley is considering an acquisition of Flagg Markets'
Fiagg currently has a cost
of equity of 10%; of its financing is in the form of and the rest
is in common
equity. Its federal-plus: tax rate is 407o. uisition, Red Vailey
expects Flagg to
have the following FCFs the next 3 years (in millions):
Year 2 Year 3
$10.00 $20.00 $2s.00
24.00 20.28
Year 1
exPense
After the free cash flows are expected to at a constant rate of
5D/a, and the capital
6. will stabilize at 35o/o debt with an rate of 7o/o.
'u. Wtrut is Flagg's unlevered cost of equity? What its levered
cost of equity and cost of
capital for the post-horizon period?
b. Uiing the adjusted present value approach, what is Flagg's
value of operations to Red Valley?
Easy Problem 1
,,R
Intermediate
' Problems 2-3
,"rr*,rrl,
The fotlowing infonnation is required to work Problems 22-1
through
22-4'
Hastings Corporation is interested in acquiring Vandell
Corporation. Vandell has 1
million shares outstanding and a target capitai structure
consisting csf 30o/o debt. Yandell's
debt interest rate is 8%. Assume that the risk-free rate of
interest is 5% and the market risk
premium is 6%. Both Vandell and Hastings face a 40oio tax
rate.
Vandell's free cash flotv (FCFo) is $2 million per year and is
expected to grow at a constant
rate of 5o/o afear; its beta is 1.4. What is the value of Vandell's
7. operations? If Vandell has
$10.82 million in debt, what is the current vaiue of vandell's
stock? (Hint: Use the
corporate vaiuation model from Chapter 7')
Hastings estimates that if it acquires Vandell, interest pa)'rnents
will be $1.5 million per
year for 3 ,vears, after which the current target capital structure
of 30% debt will be
maintained. Interest in the fourth year will be $i.472 milIion,
after which interest and the
tax shield will grow at 5%o. Synergies wili cause the free cash
flows to be $2.5 million' $2.9
million, $3.4 million, and $3.57 million in Years I through 4,
respectively, after which the
free cash flows will grow at a 5% rate. What is the unlevered
value of Vandeli, and what is
the value of its tax shields? what is the per share vaiue of
vandell to Hastings
that Vandell now has $10.82 lulli
On the basis of your answers to Probierns 2TL and22-2, indicate
the range of possible
prices that could bid for each share of Vandell
Assuming the same 22-2, suppose Hastings will increase
Vandell's level of debt at
'ear 3 to $30.6 million so that the target capital
structure is now 45o/,, debt. that with this higher level of debt
the interest rate
8. at payments in Year 4 are based on the new debt
(22-3)
Merger Bid
tll:eil.e:rpi"rrg
Fr,r,i:ic*:r ,l^.li
(22-41
Merger Valuation
with Change in
Capital Stmcture would be 8.5%, and
level from the end of 3anda interest rate. Again, free cash flows
and tax shields
Solutlon Appears ln APPenclix A
Chapter I 8 Public and Private Financing: Initial Offerings,
Seasonetl Offerings, and Investment Banks
The out-of-pocket expenses incurred by Security Brokers in the
design and distribution of
the issue were $300,000. What profit or loss would Security
Brokers incur if the issue were
sold to the public at the following average price?
a. $5 per share
b. $6 per share
c. $4 per share
9. The Beranek Company, whose stock price is now $2,5, needs to
raise $20 million in
common stock. Underwriters have informed the firm's
management that they must price
the new issue to the public at $22 per share because of signaling
effects. 'Ihe underwriters'
compensation will be 5% of the issue price, so Beranek will net
$20.90 per share. The firm
wili also incur expenses in the amount of $150,000.
How many shares must the firm sell to net $20 million aller
underwriting and flotation
expenses?
Intermediate
-
(1s-3)
Pricing Stock Issues
. Benjamin Garcia's start-up business is succeeding, but he
needs $200,000 in additional
$*di"g to fund continued growth. Benjamin and an angel
investor agree the business is
$800,000 and the angel has agreed to invest the $200,000 that is
Benjamin
and howP owns all 40,000 shares in his business. What is a fair
price per
many shares must Benjamin sell to the angel? Because the will
be sold
directly to an , there is no spread; the other flotation costs are
insignificant.
(18-4)
10. Nerru Stock Issue
Bynum and Inc. (B&C), a small jewelry manufactureryfas been
successfirl and
has enjoyed a positive
common stock, and it
trend. Now B&C is planning ta1{o public with an issue of
problem of setting an te price for the stock. The
company and its investment believe that the is to conduct a
valuation and select several
relevant comparisons.
with publicly common stock and to make
Several jewehy manufacturers are to B&C with respect to
product
mix, asset composition, and debt/equity Of these companies,
Abercrombe
Jewelers and Gunter Fashions are most si When analyzing the
following data,
assume that the most recent year has been y "normal" in the
sense that it was
neither especiaily good nor especially terms earnings, and free
cash flows.
Abercrombe is listed on the AMEX
the NASDAQ market.
on the while B&C will be traded in
Company Data
Shares outstanding
11. Price per share
Earnings per share
Free cash florv
Book value per
Total assets
million
$3s.00
$2.20
$ 1.63
$16.00
$115 million
$35 million
Gunter
10 million
$47.00
si- l -1
$2.54
$20.00
12. $250 rnillion
$50 million
B&C
500,000
A
$2.00
$18.00
$11 million
$2 millionTotal
Underwriting and
>E ?r-bh"'r g- I C,XCEL DOC
Part I Tactical F'inancial Decis:ior.rs
more important the role of investment banks vnhen the company
sells a new issue of
stock? Explain your answer.
{:i:i :i: The SEC attempts to protect investors rvho are
making sure that the information put out by a
Price to public
Number of shares
13. Proceeds to Beedles
Lg neu,ly issued securities by
and its investnrent banks is
is not misleading. However, the does not provide an opinion
about the
real the securities; hence an pay too much for some new stock
and
heavily. Do you SEC should, as a pafi of every new stock or
bond offering, an npinion to on the proper value of the
securities being
offered? Explain.
(18-4) How do you think of items would affect a company's
ability to attract
ner.r' capital and the costs involved in doing so?
A decision of a company to go public
tion of the "buy side" of the stock and bond marketsThe i
The trend financial as opposed to stand-alone investment
of the preemptive right
troduction in 1981 of shelf of securities
entering a formal agreement, investment banks carefully
investigate the companies
securities they underwritq this is especially true of the issues of
firms going public
for the first time. Because the banks do not themselves plan to
hoid the securities but
intend to sell them to otirers as soon as possibie, why are they
14. so concerned about making
carefu1 investigations?
(sr-1) Blue Coral (BCB) is planning an underwriters have said
the stock will
sell at $20 per The direct costs printing, etc.) will be $800,000.
The
underwriters 'urill a
How ust BCB sell to net $30 million?
If price the first day at $22, how much cash has IICB left on the
c. What are BCB's total costs , indirect, and underwriting) for
the IPO?
l1;,35:: "1,-,"-'.r.1:. ;i -- ' ,
"'
Gr"i security Brokers Inc. specializes in underwriting new
issues by small firms. on a recent
profit or Ltr?n# offering of Beedles Inc., the terms were as
follows:
Stock Issue
a,
b.
c.
d.
a.
b.
15. $5 per share
3 nrillion
$14,000,000
*bblca bdku* ty, ,url 24k
!#turea ty Crma Caym University.