Question 1. An investment banker enters into a best efforts arrangement to try and sell 8 million shares of stock at $20 per share for Kemp Corporation. The investment banker incurs expenses of $1 million in floating the issue and the company incurs expenses of $750,000. The investment banker will receive 8 percent of the proceeds of the offering.
a. If the offering is successful and sells out at the expected price of $20, how much money will the company receive?
b. If the offering is successful and sells out at the expected price of $20, how much money will the investment banker receive?
c. If the offering is partially successful and 6 million shares are sold at a price of $15, how much does the company receive?
d Same facts as part c. How much does the investment banker receive?
e. Who bears more risk with a best efforts deal, the company or the investment banker? Why?
Question 2. The Aleander Company plans to issue $10,000,000 of 20-year bonds next June , with semiannual interest payments. The company's current cost of debt is 9 percent. However, the firm's financial manager is concerned that interest rates will increase in coming months, and has decided to take a short position in U. S. government t-bond futures. The following settle data are available for t-bond futures.
Delivery
Month Settle
(1) (5)
Dec 102-17
Mar 101-01
June 100-12
a. Calculate the present value of the corporate bonds if rates increase by 2 percentage points.
b. Calculate the gain or loss on the corporate bond position.
c. Calculate the current value of the futures position.
d. Calculate the implied interest rate based on the current value of the futures position.
e. Interest rates increase as expected, by 2 percentage points. Calculate the present value of the futures position based on the rate calculated above plus the 2 points.
f. Calculate the gain or loss on the futures position.
g. Calculate the overall net gain or loss.
h. Is this problem an example of a perfect hedge or a cross hedge? Is it an example of speculation or hedging? Why?