Common Products has issued its $.005 par value stock in two separate financing transactions.

ASSIGNMENT 2

MGF 301

Corporation Finance

Spring 2016

DUE: Tuesday, March 1st at 7:00pm in Jacobs 365

You may in a group of up to 4 on this Assignment. Please indicate clearly on all submitted Assignments who the members of the group are. Please note, all assignments submitted with more than 4 group members will automatically receive a 0 grade.

No late assignments will be accepted. You may hand in the assignment in person in Jacobs 365 (put it under the door if no one is there) or submit it by email to the link in UBLearns before the time it is due. All electronic submissions must be to the link in UBLearns (Note: please follow all the Digital Submission rules (see Syllabus).

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Answer all of the following questions. For each answer, show your work to get full points (stating the answer alone is not sufficient).

1. Common Products has issued its $.005 par value stock in two separate financing transactions. Transaction 1: ten years ago, the founder of the company purchased 5,000,000 shares of stock for $300,000. Transaction 2: last year the company went public by issuing 10,000,000 shares of stock to the public for $28 million. Use this information to fill in the following table:

Common shares (par value) ____________________

Additional paid-in capital ____________________

Retained Earnings ____________________

Net Equity $32,000,000

2. A $1,000 face value bond of Acme Inc. pays an annual coupon and carries a coupon rate of 7.25%. It is was a 30 year bond when issued and it has 9 years remaining to maturity. If it currently has a yield to maturity of 5.75%.

(a) What interest payments do bondholders receive each year?

(b) What is the current bond price?

(c) What is the bond price if the yield to maturity rises to 6.75%?

3. A 10 year maturity bond with a coupon rate of 5.5% and face value of $1,000 makes semi-annual coupon payments. What is the bond’s yield to maturity if the bond is selling for:

(a) 900?

(b) 1,000?

(c) 1,100?

4. Large Industries annual bonds are selling at 95.70 (i.e., the price is $957 for the $1,000 bond). There are 8 years remaining until maturity on the bonds and the yield to maturity is 6.25%. Find the coupon rate. (Note: you may have to use a trial and error solution method)

5. Below are the data for two stocks, both of which have a discount rate of 9 percent:

Stock A Stock B

Return on equity 12% 10%

Earnings per share $2.20 $2.40

Dividends per share $ .55 $1.10

a. What are the dividend payout ratios for each firm?

b. What are the expected dividend growth rates for each firm?

c. What is the estimated stock price for each firm?

d. Which stock has the higher market value of equity?