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1. 16.4 Seasoned Equity Offerings in the United Statess After a banner year of rising profits and positive stock returns, the managers of Raptor Pharmaceuticals Corporation (RPC) have decided to launch a seasoned equity offering to raise new equity capital. RPC currently has 15 million shares outstanding, and yesterday's closing market price was $75.00 per RPC share. The company plans to sell 2 million newly issued shares in its seasoned offering. The investment banking firm Robbum and Blindum (R&B) has agreed to underwrite the new stock issue for a 3.0% discount from the offering price, which RPC and R&B have agreed should be $0.75 per share lower than RPC's closing price the day before the offering is sold. a. What is likely to happen to RPC's stock price when the plan for this seasoned offering is publicly announced (Mention that seasoned equity issue announcements usually cause the stock price to fall by about 3 percent)? RPC's announcement of its planned offering would cause the stock price to from $ to $ b. Assuming that RPC's stock price closes at $72.75 per share the day before the seasoned offering is launched, what net proceeds will RPC receive from this offering? $ c. Calculate the return earned by RPC's existing stockholders on their shares from the time before the seasoned offering was announced until it was actually sold for $72.75 per share. Round your answer to two decimal places. d. Calculate the total cost of the seasoned equity offering to RPC's existing stockholders as a percentage of the offering proceeds. Round your answer to two decimal places. 2. 16.6 International Common Stock Offerings Assume that the Rome Electricity Company (REC) wishes to create a sponsored ADR program worth $300 million to trade its shares on the New York Stock Exchange. Also assume that REC is currently selling on the Borsa Italiana (the Italian Stock Exchange, in Milan) for 29 per share and that the current dollar/euro exchange rate is $1.23/. American Bank and Trust (ABT) is handling the ADR issue for REC and has advised REC that the ideal trading price for utility company shares on the NYSE is about $71.34 per share (or per ADR). a. Assume that REC's stock price rises from 29 to 32 per share. If the exchange rate does not also change, what will happen to REC's ADR price? $ b. If the euro appreciates from $1.23/ to $1.31/ but the price of REC's shares remains unchanged in euros, what will happen to REC's ADR price? $ 3. 17.3 Corporate Bonds Schooner Company is contemplating offering a new $50 million bond issue to replace an outstanding $50 million bond issue. The firm wishes to take advantage of the decline in interest rates that has occurred since the initial bond issuance. The old and new bonds are described in what follows. The firm is in the 40% tax bracket. Old bonds. The outstanding bonds have a $1,000 par value and a 8% coupon interest rate. They were issued 5 years ago with a 20-year maturity. They were initially sold for their par value of $1,000, and the firm incurred $250,000 in flotation costs. They are callable at $1,080. New bonds. The new bonds would have a $1,000 par value, a 6% coupon interest rate, and a 15year maturity. They could be sold at their par value. The flotation cost of the new bonds would be $500,000. The firm does not expect to have any overlapping interest. a. Calculate the tax savings that are expected from the unamortized portion or the old bonds' flotation cost. Round your answer to the nearest whole dollar. $ b. Calculate the annual tax savings from the flotation cost of the new bonds, assuming the 15year amortization. Round your answer to the nearest whole dollar. $ c. Calculate the after-tax cost of the call premium that is required to retire the old bonds. Round your answer to the nearest whole dollar. $ d. Determine the initial investment that is required to call the old bonds and issue the new bonds. Round your answer to the nearest whole dollar. $ e. Calculate the annual cash flow savings, if any, that are expected from the proposed bond refunding decision. Round your answer to the nearest whole dollar. $ f. If the firm has a 3.6% after-tax cost of debt, find the net present value of the bond refunding decision. Round your answer to the nearest whole dollar. $ Would you recommend the proposed refunding? 4. 17.5 Leasing GMS Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 30% tax bracket, and its after-tax cost of debt is currently 5.6%. The terms of the lease and the purchase are as follows. Lease. Annual beginning-of-year lease payments of $93,500 are required over the 3-year life of the lease. The lessee will exercise its option to purchase the asset for $20,000, to be paid along with the final lease payment. Purchase. The $250,000 cost of the research equipment can be financed entirely with a 8% loan (pre-tax). The firm in this case will depreciate the equipment using the straight-line method for three years. The firm plans to keep the equipment and use it beyond its 3-year recovery period. a. Calculate the after-tax cash outflows associated with each alternative. b. Calculate the present value of each cash outflow stream using the after-tax cost of debt. Round your answers to the nearest whole dollar. Alternative After-tax Cash Outflows Year 1 Lease Purchase $ $ $ $ Year 2 Year 3 Present Value of the Cash Outflow Stream c. d. Which alternative - lease or purchase - would you recommend? 1. 16.4 Seasoned Equity Offerings in the United Statess After a banner year of rising profits and positive stock returns, the managers of Raptor Pharmaceuticals Corporation (RPC) have decided to launch a seasoned equity offering to raise new equity capital. RPC currently has 15 million shares outstanding, and yesterday's closing market price was $75.00 per RPC share. The company plans to sell 2 million newly issued shares in its seasoned offering. The investment banking firm Robbum and Blindum (R&B) has agreed to underwrite the new stock issue for a 3.0% discount from the offering price, which RPC and R&B have agreed should be $0.75 per share lower than RPC's closing price the day before the offering is sold. a. What is likely to happen to RPC's stock price when the plan for this seasoned offering is publicly announced (Mention that seasoned equity issue announcements usually cause the stock price to fall by about 3 percent)? RPC's announcement of its planned offering would cause the stock price to from $ To 2.25 to $ from $ 75 to $72.75 b. Assuming that RPC's stock price closes at $72.75 per share the day before the seasoned offering is launched, what net proceeds will RPC receive from this offering? $ $ 139680000 c. Calculate the return earned by RPC's existing stockholders on their shares from the time before the seasoned offering was announced until it was actually sold for $72.75 per share. Round your answer to two decimal places. -3.00% d. Calculate the total cost of the seasoned equity offering to RPC's existing stockholders as a percentage of the offering proceeds. Round your answer to two decimal places. 4.17% Problem 16-9 Seasoned Equity Offerings in the United States 16.4 Seasoned Equity Offerings in the United Statess After a banner year of rising profits and positive stock returns, the managers of Raptor Pharmaceuticals Corporation (RPC) have decided to launch a seasoned equity offering to raise new equity capital. RPC currently has 15 million shares outstanding, and yesterday's closing market price was $75.00 per RPC share. The company plans to sell 2 million newly issued shares in its seasoned offering. The investment banking firm Robbum and Blindum (R&B) has agreed to underwrite the new stock issue for a 3.0% discount from the offering price, which RPC and R&B have agreed should be $0.75 per share lower than RPC's closing price the day before the offering is sold. a. What is likely to happen to RPC's stock price when the plan for this seasoned offering is publicly announced (Mention that seasoned equity issue announcements usually cause the stock price to fall by about 3 percent)? RPC's announcement of its planned offering would cause the stock price to from $ 75 to $ 72.75 b. Assuming that RPC's stock price closes at $72.75 per share the day before the seasoned offering is launched, what net proceeds will RPC receive from this offering? $ 1396800 c. Calculate the return earned by RPC's existing stockholders on their shares from the time before the seasoned offering was announced until it was actually sold for $72.75 per share. Round your answer to two decimal places. -3.00 d. Calculate the total cost of the seasoned equity offering to RPC's existing stockholders as a percentage of the offering proceeds. Round your answer to two decimal places. 4.17 Hide Feedback Partially Correct Solution Correct Response Problem 16-9 Seasoned Equity Offerings in the United States 16.4 Seasoned Equity Offerings in the United Statess After a banner year of rising profits and positive stock returns, the managers of Raptor Pharmaceuticals Corporation (RPC) have decided to launch a seasoned equity offering to raise new equity capital. RPC currently has 15 million shares outstanding, and yesterday's closing market price was $75.00 per RPC share. The company plans to sell 2 million newly issued shares in its seasoned offering. The investment banking firm Robbum and Blindum (R&B) has agreed to underwrite the new stock issue for a 3.0% discount from the offering price, which RPC and R&B have agreed should be $0.75 per share lower than RPC's closing price the day before the offering is sold. a. What is likely to happen to RPC's stock price when the plan for this seasoned offering is publicly announced (Mention that seasoned equity issue announcements usually cause the stock price to fall by about 3 percent)? RPC's announcement of its planned offering would cause the stock price to from $ 75.00 to $ 72.75 b. Assuming that RPC's stock price closes at $72.75 per share the day before the seasoned offering is launched, what net proceeds will RPC receive from this offering? 1396800 $ c. Calculate the return earned by RPC's existing stockholders on their shares from the time before the seasoned offering was announced until it was actually sold for $72.75 per share. Round your answer to two decimal places. -4 d. Calculate the total cost of the seasoned equity offering to RPC's existing stockholders as a percentage of the offering proceeds. Round your answer to two decimal places. 35.31 2. 16.6 International Common Stock Offerings Assume that the Rome Electricity Company (REC) wishes to create a sponsored ADR program worth $300 million to trade its shares on the New York Stock Exchange. Also assume that REC is currently selling on the Borsa Italiana (the Italian Stock Exchange, in Milan) for 29 per share and that the current dollar/euro exchange rate is $1.23/. American Bank and Trust (ABT) is handling the ADR issue for REC and has advised REC that the ideal trading price for utility company shares on the NYSE is about $71.34 per share (or per ADR). a. Assume that REC's stock price rises from 29 to 32 per share. If the exchange rate does not also change, what will happen to REC's ADR price? $ $39.36 b. If the euro appreciates from $1.23/ to $1.31/ but the price of REC's shares remains unchanged in euros, what will happen to REC's ADR price? $ $ 37.99 16.6 International Common Stock Offerings Assume that the Rome Electricity Company (REC) wishes to create a sponsored ADR program worth $300 million to trade its shares on the New York Stock Exchange. Also assume that REC is currently selling on the Borsa Italiana (the Italian Stock Exchange, in Milan) for 29 per share and that the current dollar/euro exchange rate is $1.23/. American Bank and Trust (ABT) is handling the ADR issue for REC and has advised REC that the ideal trading price for utility company shares on the NYSE is about $71.34 per share (or per ADR). a. Assume that REC's stock price rises from 29 to 32 per share. If the exchange rate does not also change, what will happen to REC's ADR price? $ 39.36 b. If the euro appreciates from $1.23/ to $1.31/ but the price of REC's shares remains unchanged in euros, what will happen to REC's ADR price? $ 37.99 Hide Feedback Incorrect Solution Correct Response Problem 16-10 International Common Stock Offerings 16.6 International Common Stock Offerings Assume that the Rome Electricity Company (REC) wishes to create a sponsored ADR program worth $300 million to trade its shares on the New York Stock Exchange. Also assume that REC is currently selling on the Borsa Italiana (the Italian Stock Exchange, in Milan) for 29 per share and that the current dollar/euro exchange rate is $1.23/. American Bank and Trust (ABT) is handling the ADR issue for REC and has advised REC that the ideal trading price for utility company shares on the NYSE is about $71.34 per share (or per ADR). a. Assume that REC's stock price rises from 29 to 32 per share. If the exchange rate does not also change, what will happen to REC's ADR price? $ 78.72 b. If the euro appreciates from $1.23/ to $1.31/ but the price of REC's shares remains unchanged in euros, what will happen to REC's ADR price? $ 75.98 3. 17.3 Corporate Bonds Schooner Company is contemplating offering a new $50 million bond issue to replace an outstanding $50 million bond issue. The firm wishes to take advantage of the decline in interest rates that has occurred since the initial bond issuance. The old and new bonds are described in what follows. The firm is in the 40% tax bracket. Old bonds. The outstanding bonds have a $1,000 par value and a 8% coupon interest rate. They were issued 5 years ago with a 20-year maturity. They were initially sold for their par value of $1,000, and the firm incurred $250,000 in flotation costs. They are callable at $1,080. New bonds. The new bonds would have a $1,000 par value, a 6% coupon interest rate, and a 15year maturity. They could be sold at their par value. The flotation cost of the new bonds would be $500,000. The firm does not expect to have any overlapping interest. a. Calculate the tax savings that are expected from the unamortized portion or the old bonds' flotation cost. Round your answer to the nearest whole dollar. $ $75,000 b. Calculate the annual tax savings from the flotation cost of the new bonds, assuming the 15year amortization. Round your answer to the nearest whole dollar. $ $13,333 c. Calculate the after-tax cost of the call premium that is required to retire the old bonds. Round your answer to the nearest whole dollar. $ 2400000 d. Determine the initial investment that is required to call the old bonds and issue the new bonds. Round your answer to the nearest whole dollar. $ 2975000 e. Calculate the annual cash flow savings, if any, that are expected from the proposed bond refunding decision. Round your answer to the nearest whole dollar. $ 591667 f. If the firm has a 3.6% after-tax cost of debt, find the net present value of the bond refunding decision. Round your answer to the nearest whole dollar. $ $348,081.56 Would you recommend the proposed refunding? NO 5. Problem 17-7 Hint: Review PowerPoint Slide 17-22 Example or Textbook Page 560-563 Example. Problem 17-7 Corporate Bonds 17.3 Corporate Bonds Schooner Company is contemplating offering a new $50 million bond issue to replace an outstanding $50 million bond issue. The firm wishes to take advantage of the decline in interest rates that has occurred since the initial bond issuance. The old and new bonds are described in what follows. The firm is in the 40% tax bracket. Old bonds. The outstanding bonds have a $1,000 par value and a 8% coupon interest rate. They were issued 5 years ago with a 20-year maturity. They were initially sold for their par value of $1,000, and the firm incurred $250,000 in flotation costs. They are callable at $1,080. New bonds. The new bonds would have a $1,000 par value, a 6% coupon interest rate, and a 15year maturity. They could be sold at their par value. The flotation cost of the new bonds would be $500,000. The firm does not expect to have any overlapping interest. a. Calculate the tax savings that are expected from the unamortized portion or the old bonds' flotation cost. Round your answer to the nearest whole dollar. $ 75000 b. Calculate the annual tax savings from the flotation cost of the new bonds, assuming the 15-year amortization. Round your answer to the nearest whole dollar. $ 13333 c. Calculate the after-tax cost of the call premium that is required to retire the old bonds. Round your answer to the nearest whole dollar. $ 2400000 d. Determine the initial investment that is required to call the old bonds and issue the new bonds. Round your answer to the nearest whole dollar. $ 2975000 e. Calculate the annual cash flow savings, if any, that are expected from the proposed bond refunding decision. Round your answer to the nearest whole dollar. $ f. 591667 If the firm has a 3.6% after-tax cost of debt, find the net present value of the bond refunding deci- sion. Round your answer to the nearest whole dollar. 348081.5 $ Would you recommend the proposed refunding? Hide Feedback Partially Correct Solution Correct Response Problem 17-7 Corporate Bonds 17.3 Corporate Bonds Schooner Company is contemplating offering a new $50 million bond issue to replace an outstanding $50 million bond issue. The firm wishes to take advantage of the decline in interest rates that has occurred since the initial bond issuance. The old and new bonds are described in what follows. The firm is in the 40% tax bracket. Old bonds. The outstanding bonds have a $1,000 par value and a 8% coupon interest rate. They were issued 5 years ago with a 20-year maturity. They were initially sold for their par value of $1,000, and the firm incurred $250,000 in flotation costs. They are callable at $1,080. New bonds. The new bonds would have a $1,000 par value, a 6% coupon interest rate, and a 15-year maturity. They could be sold at their par value. The flotation cost of the new bonds would be $500,000. The firm does not expect to have any overlapping interest. a. Calculate the tax savings that are expected from the unamortized portion or the old bonds' flotation cost. Round your answer to the nearest whole dollar. $ 75000 b. Calculate the annual tax savings from the flotation cost of the new bonds, assuming the 15year amortization. Round your answer to the nearest whole dollar. $ c. 13333 Calculate the after-tax cost of the call premium that is required to retire the old bonds. Round your answer to the nearest whole dollar. $ 2400000 d. Determine the initial investment that is required to call the old bonds and issue the new bonds. Round your answer to the nearest whole dollar. $ 2825000 e. Calculate the annual cash flow savings, if any, that are expected from the proposed bond refunding decision. Round your answer to the nearest whole dollar. $ f. 608333 If the firm has a 3.6% after-tax cost of debt, find the net present value of the bond refunding decision. Round your answer to the nearest whole dollar. 4131857 $ Would you recommend the proposed refunding? 4. 17.5 Leasing GMS Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 30% tax bracket, and its after-tax cost of debt is currently 5.6%. The terms of the lease and the purchase are as follows. Lease. Annual beginning-of-year lease payments of $93,500 are required over the 3-year life of the lease. The lessee will exercise its option to purchase the asset for $20,000, to be paid along with the final lease payment. Purchase. The $250,000 cost of the research equipment can be financed entirely with a 8% loan (pre-tax). The firm in this case will depreciate the equipment using the straight-line method for three years. The firm plans to keep the equipment and use it beyond its 3-year recovery period. a. Calculate the after-tax cash outflows associated with each alternative. Installment amount = purchase amount / PVAF (8%,3) Installment amount = $250,000 / 2.5771 Installment amount = $97,008.2651 Installment after Tax = $97,008.2651 x (1-30%) = $ 67,905.79 Depreciation on equipment = cost / useful life Depreciation on equipment = $250,000 / 3 Depreciation on equipment = $83,333.33 Tax savings on dep. = $83,333.33 x 30% = $ 25,000.00 Installment after Tax Tax savings on dep. net cash outflow b c d=b-c e f=d*e 1 $ 67,905.79 $ 25,000.00 $ 42,905.79 0.95 $ 40,631.78 2 $ 67,905.79 $ 25,000.00 $ 42,905.79 0.90 $ 38,477.91 3 $ 67,905.79 $ 25,000.00 $ 42,905.79 0.85 $ 36,435.59 Year a PVF @ 5.6% Discounted cash outflow under purchase option Year Lease after Tax (93,500 x (1-30%) PVF @ 5.6% Amount $ 115,545.28 Amount a b 0 1 2 $ $ $ c 65,450.00 $ 1.00 65,450.00 $ 0.95 65,450.00 $ 0.90 Discounted cash outflow under Lease option f=b*c 65,450.00 61,981.15 58,695.56 186,126.71 $ $ $ $ b. Calculate the present value of each cash outflow stream using the after-tax cost of debt. Round your answers to the nearest whole dollar. Alternative After-tax Cash Outflows Year 1 Lease Purchase $ $ $ $ Year 2 Year 3 Present Value of the Cash Outflow Stream After-tax Cash Outflows Year 1 Year 2 Year 3 Present Value of the Cash Outflow Stream Lease $ $ 40,631.78 $ 38,477.91 $ 36,435.59 $ 115,545.28 Purchase $ $ 65,450.00 $ 61,981.15 $ 58,695.56 $ 186,126.71 c. Which alternative - lease or purchase - would you recommend? Purchase 6. Problem 17-14 Hint: Review PowerPoint Slide 17-30 Excel Example. Problem 17-14 Leasing 17.5 Leasing GMS Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 30% tax bracket, and its after-tax cost of debt is currently 5.6%. The terms of the lease and the purchase are as follows. Lease. Annual beginning-of-year lease payments of $93,500 are required over the 3-year life of the lease. The lessee will exercise its option to purchase the asset for $20,000, to be paid along with the final lease payment. Purchase. The $250,000 cost of the research equipment can be financed entirely with a 8% loan (pretax). The firm in this case will depreciate the equipment using the straight-line method for three years. The firm plans to keep the equipment and use it beyond its 3-year recovery period. a. Calculate the after-tax cash outflows associated with each alternative. b. Calculate the present value of each cash outflow stream using the after-tax cost of debt. Round your answers to the nearest whole dollar. Alternative After-tax Cash Outflows Year 1 Lease $ 40631.78 Purchase $ 65450.00 Year 2 38477.91 61,981.1 Year 3 36435.59 58,695.5 Present Value of the Cash Outflow Stream c. d. Which alternative - lease or purchase - would you recommend? $ 115,545. $ 186126.7 Hide Feedback Partially Correct Solution Correct Response Problem 17-14 Leasing 17.5 Leasing GMS Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 30% tax bracket, and its after-tax cost of debt is currently 5.6%. The terms of the lease and the purchase are as follows. Lease. Annual beginning-of-year lease payments of $93,500 are required over the 3-year life of the lease. The lessee will exercise its option to purchase the asset for $20,000, to be paid along with the final lease payment. Purchase. The $250,000 cost of the research equipment can be financed entirely with a 8% loan (pretax). The firm in this case will depreciate the equipment using the straight-line method for three years. The firm plans to keep the equipment and use it beyond its 3-year recovery period. a. Calculate the after-tax cash outflows associated with each alternative. b. Calculate the present value of each cash outflow stream using the after-tax cost of debt. Round your answers to the nearest whole dollar. Alternative After-tax Cash Outflows Lease Year 1 65450 $ 66008 Year 2 65450 67857 Year 3 85450 69853 Present Value of the Cash Outflow Stream c. $ Purchase $ 204057 $ 182677 d. Which alternative - lease or purchase - would you recommend