Chapter 5 Solutions: Problem 5-3 (a)

1. Can solve at least 2 ways: with calulator and Equation 5.1 or the provided spreadsheet (5.1). 2. V= P(1+(in/365)) Eq 5.1

so P= or 3. Answer: Paid .....

Provided Spreadsheet 5.1 :

Calculating Value/Yield of Money Market Securities Worksheet Par value of security Price paid for security Days to maturity Yield on security Value of security Yield on security (b) Use a yield of 2.919% as above for the high bid P=
or makes c33-c13 =

Solve for Value $13,000,000,000 98 3.114% $12,892,209,823.12

(c) Use a yield of 3.254% as above for the low bid P=

or makes c37-c13= (d) If overnight rate increases t-bill yeild increases and amount raised descreases. If overnight rate decreases then t-bill yeild decreases and amount raised increases.

Problem 5-14
a) If Rockway could raise the same amount at a lower interest rate (less than 6.75%) plus expenses. b) They would have to pay par plus 5.6% or 1.056 for calling. Amount paid would be

300,000,000X1.056= or each bondholder ($1000 certificate) = 1000 +(6.75%/2)= Total Paid back = 1000 plus interest plus call premium=

Problem 5-17 (and 5-16)

Step 1: This problem requires us to calculate the interest rate knowing the PV, FV and number of perio for 5-16: N= 12, PV-385.63 and FV is 1000. Can use calculator or recall from lecture 6 solutions that k=ann return rate= exp((ln(1/PVIF))/n) -1 so....Step 2...calculation n 12 Step 3..answer is 8.26% annual return. PV 385.63

So for problem 17 we must compute present value and the can use the calculator or Excel PV function n Part a) 8 Part b) 8 Notice... 8 Why are the three amounts ordered the way they are?

Problem 5-24

Step 1: This is a dilution of earnings problem - see page 263 - can solve with calculator or spreadshee Step 2: calculations

Dilution of Earnings

Worksheet Earnings available to common (EAC) Number of common shares Number of new common shares issued Selling price of new common shares issued Total proceeds of new common shares issued Dilution of Earnings Earnings per share (EPS) before new issue EPS after new issue Dilution per share

#DIV/0! #DIV/0! #DIV/0!

Earnings required to prevent dilution Percent return on funds raised to prevent dilution
Step 3 - answer questions.

#DIV/0! #DIV/0!

a) Initial EPS is $1.30 per cell B89. b) EPS after new issue EPS is $1.18 - is this good or bad? dilution is 18 cents. c) Funds raised are 500,000 shares x $24 x.95 or = At 12% return earnings will increase by EPS will now be (5500000 shares) #DIV/0! or an increase of 13 cents - is this good or bad? Why? What does it mean?

Problem 5-29
The first part of this question deals with the seven steps in the underwriting process. 1. decision to obtain long term financing. 2. selection of lead underwriter 3. prepare intial prospectus 4. assemble underwriting syndicate - banking and selling 5. market the issue through a road show 6. distribute the final prospectus 7. the closing b) Total commission is #sharesxissue price xcommission % 59,400,000 c) Total issue costs = amount above plus fees and expenses of 1.75 M$ 61,150,000 as a percentage of the 30 million shares at 44$ each = 4.63% d) OK - so lets figure this out: RDC pays MacD Tech 44-.045%= RDC commission: RDC to Banking makes 1% (4.5%-3.5%) or 0.44 RDC to selling group makes (4.5%-1.5%) or 3% 1.32 RDC to clients makes 4.5% or 1.98 and so....RDC's total commission is to Banks to selling group to investors # shares 15000000 10000000 5000000 Total Total commisison is So RDC makes c133/c134

e provided spreadsheet (5.1). ### v p 0.03 i 98 n

### $12,892,209,823

Money Market Securities Solve for Yield Formulas

98

#DIV/0!

=B5/((1+(B8*B7)/365)) =((C5*365)-(C6*365))/(C6*C7)

-$12,892,209,823

-$12,892,209,823 (loss)

ised descreases. t raised increases.

e (less than 6.75%) plus expenses. ount paid would be

total or per 1k$ in interest

wing the PV, FV and number of periods.

recall from lecture 6 solutions that And the PVIF = PV/FV

FV 1000

PVIF 0.39

se the calculator or Excel PV function. k FV 0.06 0.11 0.08

PV 1000 1000 1000

solve with calculator or spreadsheet (Use 5.2)

Formulas =B6/B7 =B6/(B7+B8) =B13-B14

=B8*B13 =B17/B10

derwriting process.

per per per per

share share share share

They pay: 42.02 42.46 43.34 44.00

6,600,000.00 13,200,000.00 9,900,000.00 29,700,000.00 59,400,000 (from above cell a117) 50% of the commisison for itself.