Problems:1
A stock sells for $45 rights-on, the subscription price is $41. Seven rights are required to purchase one share. What is the value of each right? What is price of stock Ex-rights?
Problem:2
Given that there are 4,000,000 shares outstanding in a corporation, how many shares will be required for a minority group of stockholders to elect 3 of the 11 members on the board of directors? (Assume cumulative voting required).
Problem:3
Cooper Construction is considering purchasing new, technologically advanced equipment. The equipment will cost $625,000 with a salvage value of $50,000 at the end of its useful life of 10 years. The equipment is expected to generate additional annual cash inflows with the following probabilities for the next ten years:
ProbabilityCash Flow
.15$ 60,000
.25 85,000
.45 110,000
.15 130,000
What is the expected value of the cash flows for this project?
Problem: 4
Bill Broodiest, star quarterback for the Spring Bay Smashers, would like to invest a small portion of his earnings in the stock of one of a few firms. His estimates of dividends and the probabilities of their occurrence follow:
Galaxy CommunicationsBreathiest Electronics
ProbabilityDividend ProbabilityDividend
.2$ 0.1$ 500
.4 700.2 700
.4 800 .4 900
.2 900.2 1,100
.1 1,200
Put answers below; provide work on next page.
A): What is the expected value for each investment?
B): What is the standard deviation and coefficient of variation for each?
C): If a third investment, with an expected value of $930 and a standard deviation of $200.25 existed, which of the THREE investments should Broodiest choose?
Problem:5
A investor must choose between two bonds, assume Par=1000
Bond A pays 80 annual dividend and has market value of 800, it has 10 years to maturity
Bond B pays 85 annual dividend and has market value of 900, it has 2 years to maturity
A, What is current yield on both bonds
B, Which bond should you select according to answer A
C, What is Yield to Maturity on Both bonds
D, Based on C, which bond would you select?
Problem 6.
Suppose a French Franc is selling for $.1286 and a Maltese Lira is selling for $2.1372, What is exchange rate(cross rate) of the French Franc to the Maltese Lira. That is, how many French Francs are equal to a Maltese Lira?.
Problem 1. answer= .50, Price Ex-rights=44.50
Problem 2. Answer= 1,000,001 shares
Problem 3. Answer =99,250
Problem 4. Answer A=Galaxy 780, Breathiest 890
Answer B=Galaxy .46, Breathiest .23
Answer C=Third Inv CV=.2153 (Galaxy CV=.46, Breathiest CV=.23, and option 3 CV=.2153)
Problem 5A, Bond A 10% current yield, Bond B 9.44% current yield
Part B, choose A
Part C, Bond A approx Yield 11.36%, Bond B approx Yield 14.36%
Part D choose bond B
Problem 6, Answer 16.62
Extra Credit Lease
Lease Problems
Problem 1
United Airlines is leasing a 10,000,000 plane from Boeing. The lease is 10 years paid annually with a residual of 50%. Boeing is will to give UAL a special lease rate of 3% if it’s an open lease, but if UAL wants a closed end lease the rate is 5%. What is the residual and payments on both the open end and closed end lease.
Problem 2
You’re considering a new car lease. The cap cost is 20,000, the residual is 70%, the rate is a special 3% for a 36 month(3year) lease. What is the residual and payment.
Problem 3
A corporation is considering leasing new equipment, the cap cost is 1,000,000, and the lease would be 7 years paid monthly, with a residual of 10% and interest rate of 6%. What is the residual value and payments.
Why would a corporation prefer a lease to a purchase??
Answer Problem 1, Residual=5million, Payment open end=719,080.71, payment closed end=866,688.58
Answer Problem 2, Residual=14,000, Payment=209.05
Answer Problem 3, Residual=100,000, Payments=13582.29
Answer problem 4, refer to your notes and chapter 16, page 485