Question 1) Mesmer Analytic, a biotechnology firm, floated an initial public offering of 2,000,000 shares at a price of $5.00 per share. The firm's owner/managers held 60 percent of the company's $1.00 par value authorized and issued stock following the public offering. One month after the IPO, the firm's board of directors declared a one-time dividend of $0.50 per share payable to all stockholders, meaning that the owner/managers would receive an immediate dividend, in part out of the pockets of the new public stockholders. What was the book value per share of the firm before and after the special dividend was paid?
Question 2) The State of Florida issued $2,000,000 of 12 percent coupon, 20-year semiannual payment, tax-exempt bonds 5 years ago. 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 percent of the face amount. Today 15-year, 10 percent, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2 percent, or $40,000. What is the net present value of the refunding?
Question 3)
I. In the event of bankruptcy, debtholders have a prior or first claim to a firm's income and assets over the claims of both common and preferred stockholders. However, in bankruptcy all debtholders are treated equally as a single class of claimants.
a. True
b. False
II. A central question that must be addressed in bankruptcy proceedings is whether the firm's inability to meet scheduled interest payments results from a temporary cash flow problem or from a potentially permanent problem caused by falling asset values.
a. True
b. False
III. The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in the order of their legal and contractual priority.
a. True
b. False
IV. The primary test of feasibility in a reorganization is whether the firm's fixed charges after reorganization can be covered by its projected cash flows.
a. True
b. False
V. Bankruptcy plays no role in settling labor disputes and product liability suits. Such issues are outside the bounds of bankruptcy law.
a. True
b. False
Question 4) American Hardware, a national hardware chain, is considering purchasing a smaller chain, Eastern Hardware. American's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Eastern is 16 percent. Eastern has 4 million shares outstanding. Eastern's current price is $16.25. What is the maximum price per share that American should offer?