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Question 5 A firm desires to sell stock to the public. The underwriter charges $0.4 million in fees and offers to buy six million shares

Question 5

A firm desires to sell stock to the public. The underwriter charges $0.4 million in fees and offers to buy six million shares from the firm at a price of $30 per share. In addition, registration and audit fees total $120,000, and marketing and miscellaneous fees add up to another $65,000. The underwriter expects to earn gross proceeds per share of $36.

a.What is the issuing firm's out-of-pocket dollar transaction cost to issue the stock?

b.Immediately after the stock was issued, the stock price rose to $38. What is the issuing firm's opportunity cost?

c.What is the total issuance cost, including opportunity costs, as a percentage of the total funds available to the issuing firm?

Question 6

A bondholder purchased an 8 percent coupon, $1,000 par three-year bond at a 7 percent yield. Interest rates then immediately fell to 6 percent and his bond was called at a price of $1,040. He reinvested his money and earned 6 percent on the $1,040 for three years.

a.Did the call help or hurt the bondholder?

b.What was his three-year rate of return on his original investment?

Question7

You bought your house five years ago and you believe you will be in the house only about five more years before it gets too small for your family. Your original home value when you bought it was $500,000, you paid 10 percent down, and you financed closing costs equal to 3 percent of the mortgage amount. The mortgage was a 25-year fixed- rate mortgage with a 5 percent annual interest rate. Rates on 30-year mortgages are now at 3 percent. Your total refinancing costs will be 3 percent of the new mortgage amount. A new down payment is not required. Should you refinance?

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