Q1. B Michaels has a chance to participate in a new public offering by Hi-Tech Micro Computers. His broker informs him that demand for the 700,000 shares to be issued is very strong His broker's firm assigned 25,000 shares in the distribution and will allow Michaels a relatively good customer, 1.3 percent of its 25,000 share allocation.
a. Compute the total dollar profit or loss on Mr. Michaels shares one week, one month and one year after the purchase. In each case, compute the profit or loss against the initial purchase price
b. Also compute this percentage gain or loss from the initial $30 price.
c. Why might a new public issue be expected to have a strong aftermarket?
Q2. The bowman corporation has a 18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at the 10 percent, the interest rates on similar issues have declined 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new $18,000,000 issue is $530,000 and the issue. The underwriting cost on the new $18,000,000 issue is $530,000, and the underwriting cost on the old issue was $380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after tax cost of debt) to analyze the refunding decision.
a. Calculate the present value of total outflows.
b. Calculate the present value of total inflows.
c. Calculate the net present value
d. Should the old issue be refunded with a new debt?