Problem 1: Assuming payments are made at the end of each year, what is the annual payment required to retire a $50,000 loan with a term of 5 years and an interest rate of 10%; how much of this payment represents interest at the end of year 1?
a. $8,189.87; $5,000
b. $13,189.87; $5,000
c. $13,189.87; $8,189.87
d. $13,189.87; $13,189.87
e. $5,000; $5,000
Problem 2: Bu-Buy owes $6 million and has a market value of assets of $4.2 million. Bankruptcy administration costs of $700,000, unpaid wages of $600,000, and other payments have resulted in $1.8 million in funds available for unsecured creditors, whose claims total $5 million. Because there are no subordinated claims, the settlement rate for the unsecured creditors is:
a. 30 percent
b. 36 percent
c. 43 percent
d. 70 percent
e. 84 percent
Problem 3: You must decide whether your firm should be reorganized or liquidated. Reorganization will require issuance of $200,000 of new equity, while if the company were liquidated $800,000 would be available to its common stockholders. If, after reorganizing, the annual earnings for your company are projected to be $100,000 and the company would trade at a price/earnings ratio of 7, you should suggest the firm be __________, because the firm's common stock value would be __________ greater than the alternative.
a. reorganized; $300,000
b. reorganized; $200,000
c. reorganized; $100,000
d. liquidated; $100,000
e. liquidated; $300,000
Problem 4: Sure-Profit is executing an IPO in which 20 million shares will be offered at a price of $10 per share. The underwriting fee is 7%, and the shares are expected to sell for $13 per share by the end of trading on the first day. The cost of this issue to Sure-Profit includes __________ in underwriting fees and __________ resulting from underpricing.
a. $18.2 million; $70 million
b. $18.2 million; $60 million
c. $14 million; $60 million
d. $14 million; $30 million
e. $7 million; $30 million