Problem 18-01

Profit or Loss on New Stock Issue

Security Brokers Inc. specializes in underwriting new issues by small firms. On a recent offering of Beedles Inc., the terms were as follows:

Price to public:

$5 per share

Number of shares:

3 million

Proceeds to Beedles:

$14,000,000

The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $400,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price?

a.$5.5 per share? Use minus sign to enter loss, if any.

$

b.$5.75 per share? Use minus sign to enter loss, if any.

$

c.$4.25 per share? Use minus sign to enter loss, if any.

$

2.Problem 18-07

eBook

Problem 18-07

Refunding Analysis

Mullet Technologies is considering whether or not to refund a $225 million, 14% coupon, 30-year bond issue that was sold 5 years ago. It is amortizing $3 million of flotation costs on the 14% bonds over the issue's 30-year life. Mullet's investment banks have indicated that the company could sell a new 25-year issue at an interest rate of 10% in today's market. Neither they nor Mullet's management anticipate that interest rates will fall below 10% any time soon, but there is a chance that rates will increase.

A call premium of 11% would be required to retire the old bonds, and flotation costs on the new issue would amount to $4 million. Mullet's marginal federal-plus-state tax rate is 40%. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 7% annually during the interim period.

a.Conduct a complete bond refunding analysis. What is the bond refunding's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

$

b.What factors would influence Mullet's decision to refund now rather than later?