Finance Study For Final

South Shore Limited has 21,000 shares of stock outstanding with a par value of $1 per share and a market price of $77.50 a share. The firm just announced a 5-for-2 stock split. What will the par value of the stock be after the split?

$.40

The stock of Cleaner Homes is currently selling for $16.90 a share. The company has decided to raise funds through a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares being offered are priced at $14 plus four rights. What is the value of one right?

$0.58 Cost per share = [$14 + (4 × $16.90)] / (1 + 4) = $16.32 Value of right = $16.90 - 16.32 = $.58

Mountain Products has decided to raise $8.4 million in additional funding via a rights offering. The firm will issue one right for each share of stock outstanding and it will take 4 rights to purchase one new share. The offering consists of a total of 210,000 new shares. The current market price of the stock is $45.60. What is the value of one right?

$1.12 Subscription price = $8,400,000 / 210,000 shares = $40 a share Cost per share = [$40 + (4 × $45.60] / (1 + 4) = $44.48 Value of right= $45.60 - 44.48 = $1.12

Josh's, Inc. has 5,000 shares of stock outstanding with a par value of $1 per share and a market value of $27 a share. The balance sheet shows $103,000 in the capital in excess of par account, $5,000 in the common stock account, and $164,800 in the retained earnings account. The firm just announced a stock dividend of 10 percent. What is the value of the capital in excess of par account after the dividend?

$116,000

Bakers' Town Bread is selling 1,200 shares of stock through a Dutch auction. The bids received are as follows: 100 shares at $14 a share, 300 shares at $12, 400 shares at $11, 700 shares at $10, and 900 shares at $9 a share.How much cash will Bakers' Town Bread receive from selling these shares of stock? Ignore all transaction and flotation costs.

$12,000 Total cash received = 1,200 × $10 = $12,000

Verbal Communications, Inc., has 12,500 shares of stock outstanding with a par value of $1 per share and a market value of $27 per share. The firm just announced a stock dividend of 100 percent. What is the market value per share after the dividend?

$13.50 Market value per share = (12,500 ×$27) / (12,500 ×2) = $13.50

Alfonzo's Italian House has 25,000 shares of stock outstanding with a par value of $1 per share and a market price of $28 a share. The firm just announced a 5-for-3 stock split. What will the market price per share be after the split?

$16.80 Market price per share = $28 ?3/5 = $16.80

Over-the-Road Trucking is considering investing in a new project that will cost $6.8 million and increase net income by 9.2 percent. This project will be completely funded by issuing new equity shares. Currently, the firm has 1.34 million shares of stock outstanding with a market price of $39 per share. The current earnings per share are $2.34. What will the earnings per share be if the project is implemented?

$2.26 New earnings per share = ($2.34 ×1,340,000 ×1.092) / [1,340,000 + ($6,800,000 / $39)] = $2.26

Delaware Trust has 450 shares of common stock outstanding at a market price per share of $27. Currently, the firm has excess cash of $400, total assets of $28,900, and net income of $1,320. The firm has decided to pay out all of its excess cash as a cash dividend. What will the earnings per share be after this dividend is paid?

$2.93 Earnings per share = $1,320 / 450 = $2.93

The Tanning Bed has 10,000 shares of stock outstanding with a par value of $1 per share and a market value of $8 per share. The balance sheet shows $10,000 in the common stock account, $60,000 in the capital in excess of par account, and $94,300 in the retained earnings account. The firm just announced a 100 percent stock dividend. What will be the value of the common stock account after the dividend?

$20,000 Common stock = [(10,000 shares ×1) ×$1] + $10,000 = $20,000

Tucker's National Distributing has a current market value of equity of $10,665. Currently, the firm has excess cash of $640, total assets of $22,400, net income of $3,210, and 500 shares of stock outstanding. Tucker's is going to use all of its excess cash to repurchase shares of stock. What will the stock price per share be after the stock repurchase is completed?

$21.33

Ma's Fried Chicken has 15,000 shares of stock outstanding with a par value of $1 per share and a market value of $38 per share. The balance sheet shows $63,000 in the capital in excess of par account, $15,000 in the common stock account, and $137,000 in the retained earnings account. The firm just announced a 5 percent stock dividend. What will total owners' equity be after the dividend?

$215,000 Total equity will not change as this is a small stock dividend. Total equity = $63,000 + 15,000 + 137,000 = $215,000

Winston's has 18,000 shares outstanding with a book value of $348,000 and a market value of $501,660 and has net income of $21,000. The firm is considering a project with a net present value of $4,500 that would require the purchase of $175,000 of fixed assets.The project would be financed through the sale of equity shares. The price-earnings ratio of the project equals that of the existing firm. What will the new market value per share be after the project is implemented?

$28.06 Current market value per share = $501,660 / 18,000 = $27.87 Number of new shares needed = $175,000 / $27.87 = 6,279.15 shares New market value per share = ($501,660 + 175,000 + 4,500) / (18,000 + 6,279.15) = $28.06

Val's Marina Supply has 5,500 shares of stock outstanding with a par value of $1 per share and a market value of $33 per share. The balance sheet shows $5,500 in the common stock account, $29,600 in the capital in excess of par account, and $56,400 in the retained earnings account. The firm just announced a 100 percent stock dividend. What is the value of the capital in excess of par account after the dividend?

$29,600

The Boat Works has decided to take the company public by offering a total of 150,000 shares of common stock to the public. The firm has hired an underwriter who arranges a firm commitment underwriting and suggests an initial selling price of $22 a share with a spread of 8 percent. As it turns out, the underwriters only sell 122,400 shares. How much cash will the firm receive from its first public offering?

$3,036,000 Total cash received = 150,000 × $22 (1 - .08) = $3,036,000

On July 9, you purchased 600 shares of Blue Water stock for $32 a share. On August 4, you sold 100 shares of this stock for $33 a share. You sold an additional 100 shares on August 14 at a price of $34.50 a share. The company declared a dividend of $.76 per share on August 3 to holders of record as of Monday, August 17. This dividend is payable on September 15. How much dividend income will you receive on September 15?

$380 Dividend received = $.76 ×(600 - 100) = $380

You own 1,600 shares of Dell Hardware. The company plans on issuing a dividend of $.58 a share at the end of this year and then issuing a final liquidating dividend of $5.30 a share at the end of next year. Your required rate of return on this security is 17 percent. Ignoring taxes, what is the value of one share of this stock to you today?

$4.37 P0 = ($.58 / 1.17) + ($5.30 / 1.172) = $4.37

Al owns 400 shares of M&M Enterprises and earns 13.2 percent on his investments. M&M recently stated that it will pay dividends per share of $.48 this year and $.55 next year. Al does not want any dividend income this year but does want as much dividend income as possible next year. Ignoring taxes, what will Al's total homemade dividend be next year?

$437.34 Homemade dividend Next year = [($.48 × 1.132) + $.55] × 400 = $437.34

The Timken Company has announced a rights offer to raise $18 million for a new journal. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $2,500 per page. The stock currently sells for $49 per share and there are 1.52 million shares outstanding. The subscription price is set at $45 per share. What is the ex-rights price per share?

$48.17 Number of new shares = $18,000,000 / $45 = 400,000 Number of rights needed to buy one share = 1,520,000 / 400,000 = 3.8 Ex-rights price per share = [$45 + (3.8 × $49)] / [1 + 3.8] = $48.17

Aaron purchased 200 shares of KMP stock on May 8. On May 16, he purchased another 300 shares and then on May 20 he purchased a final 100 shares of KMP stock. The company declared a dividend of $1.22 a share on May 6 to holders of record on Friday, May 22. The dividend is payable on June 12. How much dividend income will Steve receive on June 12?

$610 Dividend received = $1.22(200 + 300) = $610

Richard has an outstanding order with his stockbroker to purchase 1,000 shares of every IPO. The next three IPOs are each priced at $30 a share and will all start trading on the same day. Richard is allocated 1,000 shares of IPO A, 400 shares of IPO B, and 100 shares of IPO C. On the first day of trading, IPO A opened at $31.50 a share and ended the day at $28.25 a share. IPO B opened at $31 a share and finished the day at $32 a share. IPO C opened at $36.50 a share and ended the day at $38.75 a share. What is Richard's total profit or loss on these three IPOs as of the end of the first day of trading?

-$75 Total profit = [1,000 × ($28.25 - 30)] + [400 × ($32 - 30)] + [100 × ($38.75 - 30)] = -$75

You own 12 percent, or 15,000 shares, of Printers Ink stock that has a total market value of $678,300. By what percentage will the total value of your investment in this firm change if the company sells an additional 12,500 shares of stock at $43.50 a share and you do not buy any?

-.35% Current number of shares outstanding = 15,000 / .12 = 125,000 Price per share = $678,300 / 15,000 = $45.22 New market value per share = [(125,000 × $45.22) + (12,500 × $43.50)] / (125,000 + 12,500) = $45.06 Percent change = ($45.06 - 45.22) / $45.22 = -.0035 or -.35 percent

The equity of Blooming Roses has a total market value of $16,000. Currently, the firm has excess cash of $1,400 and net income of $15,400. There are 750 shares of stock outstanding. What will be the percentage change in the stock price per share if the firm pays out all of its excess cash as a cash dividend?

-8.7% P Pre-dividend = $16,000 / 750 = $21.33 P Post-dividend = ($16,000 - 1,400) / 750 = $19.47 Percentage change in price = ($19.47 - 21.33) / $21.33 = -.087, or -8.7 percent

The Warm Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $100 to $90 ($100 is the rights-on-price; $90 is the ex-rights price). The company is seeking $18 million in additional funds with a per-share subscription price of $50. How many shares of stock are outstanding, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds of the offering.)

1,440,000 PEx = $90 = ($50 + $100N) / (N + 1) N = 4 Number of new shares = $18,000,000 / $50 = 360,000 shares Number of old shares = 4 × 360,000 = 1,440,000 shares

A firm wants to maintain a stock price around $15 a share. Due to a recent market downturn, the stock is currently selling for $6 a share. The firm should consider a:

1-for-3 reverse stock split.

You currently own 12 percent of the 2.8 million outstanding shares of Webster Mills. The company has just announced a rights offering with a subscription price of $23 a share. One right will be issued for each share of outstanding stock. This offering will provided $4.6 million of new financing for the firm, ignoring all issue costs. Assume that all rights are exercised. What will be your new ownership position if you opted to sell your rights rather than exercise them personally?

11.2% Number of shares owned = .12 × 2,800,000 = 336,000 Number of shares offered = $4,600,000 / $23 = 200,000 New ownership position = 336,000 / (2,800,000 + 200,000) = .112, or 11.2 percent

High Mountain Mining wants to expand its current operations and requires $2.7 million in additional funding to do so. After discussing this with key shareholders, the firm has decided to raise the necessary funds through a rights offering at a subscription price of $20 a share. The current market price of the firm's stock is $22.70 a share. How many shares of stock will the firm need to sell through the rights offering to fund the expansion plans? (Round up to the next whole share.)

135,000 Number of shares = $2,700,000 / $20 = 135,000shares

The ex-dividend date is defined as _____ business day(s) before the date of record.

2

Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent:

2 years

Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs $8.6 million to buy land and establish its operations. Currently, the firm has 540,000 shares of stock outstanding at a market price per share of $47.50. If the firm decides to raise the needed capital through a rights offering, one right will be issued for each share of stock. The subscription price will be set at $40 a share. How many rights will a shareholder need to purchase one new share of stock in this offering?

2.51 rights Number of rights issued = 1 right per share × 540,000 shares = 540,000 rights Number of shares needed = $8,600,000 / $40 = 215,000 Rights needed for each new share = 540,000 / 215,000 = 2.51 rights

A.K. Stevenson wants to raise $10.2 million through a rights offering. The subscription price is set at $16 a share. Currently, the company has 1.7 million shares outstanding with a current market price of $25 a share. Each shareholder will receive one right for each share of stock they currently own. How many rights will be needed to purchase one new share of stock in this offering?

2.67 rights Number of rights issued = 1 right per share × 1,700,000 shares = 1,700,000 rights Number of shares needed = $10,200,000 / $16 = 637,500 shares Rights needed for each new share = 1,700,000 / 637,500 = 2.67 rights

A small stock dividend is defined as a stock dividend of less than _____ percent.

20 to 25

The last date on which you can purchase shares of stock and still receive the next dividend is the date that is _____ business day(s) prior to the date of record.

3

Mountain Teas wants to raise $8.9 million to open a new production center. The company estimates the issue costs for legal and accounting fees will be $510,000. The underwriters have set the stock price at $26 a share and the underwriting spread at 8.35 percent. How many shares of stock does Mountain Teas have to sell to meet its cash need? (Round up to the next whole share.)

394,897 shares Total value of issue = ($8,900,000 + 510,000) / (1 - .0835) = $10,267,321.33 Number of shares needed = $10,267,321.33 / $26 = 394,896.97, or 394,897 shares

Kurt currently owns 4.6 percent of Northeastern Transportation. The company has a total of 465,000 shares outstanding with a current market price of $26.20 a share. At present, the firm is offering an additional 25,000 shares at a price of $25 a share. Kurt decides not to participate in this offering. What will his ownership position be after the offering is completed?

4.37 % Number of shares owned =.046 × 465,000 = 21,390 New ownership position = 21,390 / (465,000 + 25,000) = .0437, or 4.37 percent

TJ's has a market value equal to its book value. Currently, the firm has excess cash of $389,000, other assets of $911,674, and equity of $886,200. The firm has 60,000 shares of stock outstanding and net income of $984,800. Management has decided to spend 20 percent of the firm's excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?

54,733 shares Price per share = $886,200 / 60,000 = $14.77 Number of shares repurchased = [(.20 × $389,000] / $14.77 = 5,267.43 New number of shares outstanding = 60,000 - 5,267.43 = 54,733

Flagler, Inc. needs to raise $14.7 million to finance its expansion. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $26 per share and the company's underwriters charge a spread of 8.5 percent. How many shares need to be sold? (Round up the next whole share.)

617,907 shares Required sales proceeds: $14,700,000 / (1 - .085) = $16,065,573.77 Number of shares needed = $16,065,573.77 / $26 = 617,906.68, or 617,907

Outdoor Living needs $14.6 million to finance updates and additions to its production equipment. The underwriters estimate that the firm could sell additional shares of stock at $23.50 a share with an underwriting spread of 7.75 percent. This would be a firm commitment underwriting. The estimated issue costs are $368,000. How many shares of stock will Outdoor Living need to sell to finance this project? (Round up to the next whole share.)

690,446 shares Total value of issue = ($14,600,000 + 368,000) / (1 - .0775) = $16,225,474.25 Number of shares needed = $16,225,474.25 / $23.50 = 690,445.71, or 690,446 shares

Which one of the following is a direct result of a 2-for-1 stock split?

A 50 percent decrease in the par value per share.

Which one of the following statements related to cash dividends is correct?

A dividend is never a liability of the issuer until it has been declared.

What is a prospectus?

A document that describes the details of a proposed security offering along with relevant information about the issuer.

What is the definition of a syndicate?

A group of underwriters sharing the risk of selling a new issue of securities.

Stock splits can be used to:

Adjust the market price of a stock so it falls within a preferred trading range.

Rights Offer

Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the firm is issuing additional shares and he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called?

The dividend market is in equilibrium when:

All clienteles are satisfied.

With Dutch auction underwriting:

All successful bidders pay the same price per share.

Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8 percent and paid Blue Stone Builders $16.40 a share on 40,000 shares. Which one of the following terms best describes this underwriting?

Best Offer

Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7. Ted purchased 100 shares of Fast Deliveries stock on Thursday, July 8. Fast Deliveries declared a dividend on June 20 to shareholders of record on July 12 and payable on August 1. Which one of the following statements concerning the dividend paid on August 1 is correct given this information?

Both Ted and Kate are entitled to the dividend.

Venture Capital

Business Aid is funded by a group of wealthy investors for the sole purpose of providing funding for individuals and small firms that are trying to convert their new ideas into viable products. What is this type of funding called?

The total direct costs of underwriting an equity IPO:

Can be as low as 5.5 percent and as high as 25 percent of proceeds.

The common stock of Dayton Dry Goods has historically had a low dividend yield that is expected to continue. As a result, the majority of its shareholders are individuals who prefer capital gains over cash dividends for tax reasons. The fact that most of these shareholders have similar characteristics is referred to by which one of the following terms?

Clientele Effect

Firm Committment

D.L. Jones & Co. recently went public. The firm received $20.80 a share on the entire offer of 25,000 shares. Keeser & Co. served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share. What type of underwriting was this?

Dividend payments are distributed on which one of the following dates?

Day of payment

When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:

Decrease

Term Loans

Direct business loans typically ranging from one to five years are called:

Frozen Foods just paid out $3.62 a share to its shareholders. The cash for these payments came from a large sale of assets, not from any earnings of the firm. What are these payments to shareholders called?

Distributions

Which one of the following statements related to dividend policy is correct?

Dividend policy focuses on the timing of dividend payments.

Which one of the following statements appears to be supported by the current dividend policies of U.S. industrial firms?

Dividends are still viewed by shareholders as a signal of a firm's future outlook.

An investor is more likely to prefer a high dividend payout if a firm:

Has few, if any, positive net present value projects.

Automatic dividend reinvestment plans:

Help shareholders create their own homemade dividend policies.

A one-for-four reverse stock split will:

Increase a $1 par value to $4.

Which one of the following is a result of a small stock dividend?

Increase in Common stock

If you ignore taxes and costs, a stock repurchase will:

Increase the earnings per share.

A stock repurchase program:

Is essentially the same as a cash dividend program provided there are no taxes or other costs.

Aaron owns 1,600 shares of LP Gas stock which he purchased six years ago at a price of $18 a share. Today, these shares are selling for $26 each. Aaron is subject to a tax rate of 20 percent on both his dividend income and his capital gains. Ignore costs. From Aaron's point of view, a stock repurchase today:

Is more desirable than a cash dividend in respect to taxes.

As of 2014, dividend income received by an individual:

Is taxed at a maximum rate of 20 percent.

With firm commitment underwriting, the issuing firm:

Knows upfront the amount of money it will receive from the stock offering.

S.L. Moffatt, Inc. has paid a quarterly dividend of $1.20 per share for the last 10 quarters. Which one of the following is most apt to cause the firm to reduce the amount of its next dividend payment?

Loss of a major customer which lowers the firm's outlook for the next few years.

The fact that flotation costs can be significant is an argument for:

Maintaining a low dividend policy and rarely issuing extra dividends

Which one of the following statements is correct? Firms prefer to cut dividend payments rather than borrow money to fund a short-term cash need. Share repurchases tend to increase agency costs. Maintaining a steady dividend is a key goal of most dividend-paying firms. Tax rates are the key factor in determining a firm's dividend policy. Stock prices tend to ignore expected changes in dividend payments.

Maintaining a steady dividend is a key goal of most dividend-paying firms.

Green Shoe Provision

Mobile Units recently offered 30,000 new shares of stock for sale. The underwriters sold a total of 32,000 shares to the public at a price of $14.50 a share. The additional 2,000 shares were purchased in accordance with which one of the following?

Northwest Rail wants to raise $14.2 million through a rights offering so it can purchase additional rail cars and upgrade its maintenance facilities. How many shares of stock will the firm need to sell through this offering if the current market price is $34 a share and the subscription price is $31 a share? (Round up to the next whole share.)

Number of shares = $14,200,000 / $31 = 458,064.52, or 458,065 shares

Franklin Minerals recently had a rights offering of 1,000 shares at an offer price of $10 a share. Isabelle is a shareholder who exercised her rights option by buying all of the rights to which she was entitled based on the number of shares she owns. Currently, there are six shareholders who have opted not to participate in the rights offering. Isabelle would like to purchase the unsubscribed shares. Which one of the following will allow her to do so?

Oversubscription Priviledge

Shelf Registration

Pearson Electric recently registered 250,000 shares of stock under SEC Rule 415. The firm plans to sell 150,000 shares this year and the remaining 100,000 shares next year. What type of registration was this?

Before a seasoned stock offering, you owned 7,500 shares of a firm that had 500,000 shares outstanding. After the seasoned offering, you still owned 7,500 shares but the number of shares outstanding rose to 625,000. Which one of the following terms best describes this situation?

Percentage ownership dilution.

The High-End mutual fund recently loaned $9.2 million to Henderson Hardware for 10 years at 6.4 percent interest. This loan is best described as a:

Private Placement

Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the firm is issuing additional shares and he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called?

Rights Offer

What is a seasoned equity offering?

Sale of newly issued equity shares by a firm that is currently publicly owned.

All new interstate security issues are regulated by the:

Securities Act of 1933.

Which one of the following statements related to stock repurchases is correct?

Stock repurchases can be a relatively tax-efficient method of distributing cash to shareholders.

To purchase a share in a rights offering, an existing shareholder generally just needs to:

Submit the required number of rights along with the subscription price.

Which one of the following is a key goal of the aftermarket period?

Supporting the market price for a new securities issue.

Which one of the following favors a low dividend policy?

The tax on capital gains is deferred until the gain is realized.

Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called:

Tombstones

Bell Weather Markets has recently sold for as little as $8 a share and as much as $15 a share. The difference between these two prices is referred to as the:

Trading Range

Business Aid is funded by a group of wealthy investors for the sole purpose of providing funding for individuals and small firms that are trying to convert their new ideas into viable products. What is this type of funding called?

Venture Capital

Which one of the following statements concerning venture capital financing is correct?

Venture capitalists often require at least a 40 percent equity position as a condition of financing.

Billingsley United declared a $.20 a share dividend on Thursday, October 16. The dividend will be paid on Monday, November 10, to shareholders of record on Friday, October 31. Which one of the following is the ex-dividend date?

Wednesday, October 29

Homemade Dividend

Which one of the following refers to the ability of shareholders to undo a firm's dividend policy and create an alternative dividend policy by reinvesting dividends or selling shares of stock?

Which one of the following is the best justification for a reverse stock split?

avoid delisting

The board of directors of Wilson Sporting Equipment met this afternoon and passed a resolution to pay a cash dividend of $.42 a share next month. In relation to this dividend, today is referred to as which one of the following dates?

declaration date

Green Roof Motels has more cash on hand than its operations require. Thus, the firm has decided to pay out some of its earnings in the form of cash to its shareholders. What are these payments to shareholders called?

dividends

Shares of PLS United have been selling with rights attached. Tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock?

ex-rights date

D.L. Jones & Co. recently went public. The firm received $20.80 a share on the entire offer of 25,000 shares. Keeser & Co. served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share. What type of underwriting was this?

firm committment

The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _____ period.

quiet

A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a _____ underwriting.

standby

HJ Corporation has excess cash and has opted to buy some of its outstanding shares. What is this process of buying called?

stock repurchase

Revol-Tech is a technology firm with excellent growth prospects. The firm wishes to do something to acknowledge the loyalty of the shareholders but needs all of its available cash to fund the firm's rapid growth. The market price of the stock is currently trading at the upper end of its preferred trading range. The firm is most apt to consider which one of the following in this situation?

stock split

Which one of the following does not affect the total equity of a firm but does increase the number of shares outstanding?

stock split