problem set 4 mindtap
FINANCE 650 MINDTAP PROBLEM SET 4
1.Profit or Loss on New Stock Issue
Beedles Inc. needed to raise $14 million in an IPO and chose Security Brokers Inc. to underwrite the offering. The agreement stated that Security Brokers would sell 3 million shares to the public and provide $14 million in net proceeds to Beedles. The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $380,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answers to the nearest dollar. Loss should be indicated by a minus sign.
$4.5 per share?
$ 
$6 per share?
$
$3.75 per share?
$
| 2. Pricing Stock Issues in an IPO Zang Industries has hired the investment banking firm of Eric, Schwartz, & Mann (ESM) to help it go public. Zang and ESM agree that Zang's current value of equity is $61 million. Zang currently has 5 million shares outstanding and will issue 1 million new shares. ESM charges a 5% spread. What is the correctly valued offer price? Do not round intermediate calculations. Round your answer to the nearest cent. $ How much cash will Zang raise net of the spread (use the rounded offer price)? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar. $ |
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3. Tax Shield Value
Wilde Software Development has a 12% unlevered cost of equity. Wilde forecasts the following interest expenses, which are expected to grow at a constant 4% rate after Year 3. Wilde's tax rate is 25%.
| Year 1 | Year 2 | Year 3 | |
| Interest expenses | $80 | $110 | $130 |
What is the horizon value of the interest tax shield? Do not round intermediate calculations. Round your answer to the nearest cent.
$
What is the total value of the interest tax shield at Year 0? Do not round intermediate calculations. Round your answer to the nearest cent.
$
4. Liquidation
Southwestern Wear Inc. has the following balance sheet:
| Current assets | $1,875,000 |
| Accounts payable | $ 375,000 |
| Fixed assets | 1,875,000 |
| Notes payable | 750,000 |
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| Subordinated debentures | 750,000 |
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| Total debt | $1,875,000 |
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| Common equity | 1,875,000 |
| Total assets | $3,750,000 |
| Total liabilities & equity | $3,750,000 |
The trustee's costs total $279,750, and the firm has no accrued taxes or wages. Southwestern has no unfunded pension liabilities. 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 $2.2 million is received from sale of the assets? Round your answers for monetary values to the nearest dollar and for percentage values to the nearest whole number. If your answer is zero, enter “0”. Enter your answers as positive values.
Distribution of proceeds on liquidation:
| Proceeds from the sale of assets | $ | |
| Less: | ||
| 1. First mortgage (paid from the sale of fixed assets) | |
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| 2. Fees and expenses of bankruptcy | |
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| 3. Wages due to workers within 3 months of bankruptcy | |
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| 4. Taxes due to federal, state, and local governments | |
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| 5. Unfunded pension liabilities | |
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| Funds available for distribution to general creditors | $ | |
Distribution to general creditors:
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| Distribution after Subordination Adjustment | Percentage of Original Claim Received |
| Accounts payable | $ | $ | $ |
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| Notes payable | | | |
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| Subordinated debentures | | | |
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| Total | $ | $ | $ |
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Round your answer for monetary value to the nearest dollar and for percentage value to two decimal places.
The remaining $ will go to the common stockholders. They will receive only % of the amount of equity on the balance sheet.
