- 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 benefitsfrom 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 NPVof the merger. (20points)
- Figure out the stock priceof 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 NPVof the merged firm.(20points)
- Figure outthe 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 b. False
- Underpricingis the difference between the underwriters’ cost of buying shares and the offering price of those securities to the public. (15points)
- True b. False
- According to Green Shoe provision, underwriters can purchase additional shares at a lower price thanthe offering price to cover excess demand. (15points)
- True b. False
- Stock repurchasemay send a negative signal that a firm does not have any profitable investment opportunities. (15points)
- True b. False
- According to Dividend preference theory, higher payout leads to lower agency costs, thereby resulting in higher stock price. (15points)
- True b. False
- Employee stock options (ESO)s are “out-of-the money” when they are issued.(15points)
- True b. False
- Employee stock options (ESO) backdatingis a practice of selecting a grant date on which the stock price is low. Therefore, this practice is illegal or unethical. (15points)
- True b. False
- Inconvertible bonds, conversion premium is the difference between conversion price and bond price, divided by bond price. (15points)
- True b. False
- Stock warrantsare long-maturity call options like ESO, while they are listed and traded on the exchange unlike ESO. (15points)
- True b. False
- If managers ignorereal options such as option to wait, they could underestimate the NPV of a project. (15points)
- True b. False
