Someone help with question 3

questions 5, 6 ,7, 8 under exihbit 5.1

question 12 and 17

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MONMOUTH UNIVERSITY Leon Hess Business School Department of Economics, Finance and Real Estate BF612 - Homework Assignment 5 Due April 13, 2016 Please note that spelling, grammar, punctuation, capitalization and style are all part of an effective presentation and report and will be considered in evaluating all submitted work product. Often it is not just what you know but how you present it that matters. Conduct a Google or other Internet search for your DJ firm to find their Investor Relations corporate web site. Locate their SEC Filings, select Proxy Statements and download their most recent SEC Form DEF 14A which is the annual legal filing required by the SEC relating to shareholders voting, compensation, governance and other matters. Alternatively you may go directly to the SEC web site at www.sec.gov to find the most recent Proxy Statement. You will be using this Proxy Statement for Part 1 below and for additional items over the course of the semester. Part 1 Proxy Statement Analysis: Review your DJ Company's Proxy Statement. Please answer the following questions in 1 to 2 paragraphs each based on the information you reviewed: 1. Describe any significant efforts disclosed in the Proxy Statement with respect to addressing concerns over corporate governance. 2. Did the board of directors appear to be qualified in your opinion for guiding the company? Why or why not? 3. Describe a shareholder proposal that was under consideration - would you have supported this proposal or opposed it? Why? 4. Review the compensation analysis provided in the Proxy Statement; were the senior officers compensated well in your opinion? 5. What percentage of the company's stock is owned in total by the directors and executive officers? Does that number surprise you? 1 Part 2 Problems from the Brigham Text: 1. In its negotiations with its investment bankers, Patton Electronics has reached an agreement whereby the investment bankers receive a smaller fee now (6% of gross proceeds versus their normal 10%) but also receive a 1-year option to purchase an additional 200,000 shares at $5.00 per share. Patton will go public by selling $5,000,000 of new common stock. The investment bankers expect to exercise the option and purchase the 200,000 shares in exactly one year, when the stock price is forecasted to be $6.50 per share. However, there is a chance that the stock price will actually be $12.00 per share one year from now. If the $12 price occurs, what would the present value of the entire underwriting compensation be? Assume that the investment banker's required return on such arrangements is 15%, and ignore taxes. 2. 10 years ago, the City of Melrose issued $3,000,000 of 8% coupon, 30-year, semiannual payment, tax-exempt muni bonds. The bonds had 10 years of call protection, but now the bonds can be called if the city chooses to do so. The call premium would be 6% of the face amount. New 20-year, 6%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2% of the amount of bonds sold. What is the net present value of the refunding? Note that cities pay no income taxes, hence taxes are not relevant. 3. Five years ago, the State of Oklahoma issued $2,000,000 of 7% coupon, 20-year semiannual payment, tax-exempt bonds. The bonds had 5 years of call protection, but now the state can call the bonds if it chooses to do so. The call premium would be 5% of the face amount. Today 15-year, 5%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2%. What is the net present value of the refunding? Because these are tax-exempt bonds, taxes are not relevant. 4. Stanovich Enterprises has 10-year, 12.0% semiannual coupon bonds outstanding. Each bond is now eligible to be called at a call price of $1,060. If the bonds are called, the company must replace them with new 10-year bonds. The flotation cost of issuing new bonds is estimated to be $45 per bond. How low would the yield to maturity on the new bonds have to be in order for it to be profitable to call the bonds today, i.e., what is the nominal annual "breakeven rate"? Exhibit 5.1 Five years ago, NorthWest Water (NWW) issued $50,000,000 face value of 30-year bonds carrying a 14% (annual payment) coupon. NWW is now considering refunding 2 these bonds. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NWW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. 5. Refer to Exhibit 5.1. What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding? 6. Refer to Exhibit 5.1. What will the after-tax annual interest savings for NWW be if the refunding takes place? 7. Refer to Exhibit 5.1. The amortization of flotation costs reduces taxes and thus provides an annual cash flow. What will the net increase or decrease in the annual flotation cost tax savings be if refunding takes place? 8. Refer to Exhibit 5.1. What is the NPV if NWW refunds its bonds today? 9. Stanley Inc. must purchase $6,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasing. The company has a zero tax rate due to tax loss carry-forwards, and is considering a 5-year, bank loan to finance the equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Stanley can also lease the equipment for 5 end-of-year payments of $1,790,000 each. How much larger or smaller is the bank loan payment than the lease payment? Note: Subtract the loan payment from the lease payment. 10. To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering a leasing arrangement. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL), in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands.) 11. The common stock of Southern Airlines currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000) sell for $850. Each debenture can be converted into 3 25 shares of common stock at any time before 2025. What is the conversion value of the bond? 12. Preissle Company, wants to sell some 20-year, annual interest, $1,000 par value bonds. Its stock sells for $42 per share, and each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par? 13. Potter & Lopez Inc. just sold a bond with 50 warrants attached. The bonds have a 20year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant? Exhibit 14.1 The following data apply to Neuman Corporation's convertible bonds: Maturity: Stock price: Par value: Conversion price: Annual coupon: Straight-debt yield: 10 $30.00 $1,000.00 $35.00 5.00% 8.00% 14. Refer to Exhibit 14.1. What is the bond's conversion ratio? 15. Refer to Exhibit 14.1. What is the bond's conversion value? 16. Refer to Exhibit 14.1. What is the bond's straight-debt value? 17. Refer to Exhibit 14.1. What is the minimum price (or "floor" price) at which the Neuman's bonds should sell? 4