Neil@UPMKB2024

1

FIN5100 – Corporate Finance

Long-Term Financing

Assignment

Question 1.

The shareholders of the Pineapple Company need to elect seven new directors. There

are 890,000 shares outstanding currently trading at $49 per share. You would like to

serve on the board of directors; unfortunately, no one else will be voting for you.

a. How much will it cost you to be certain that you can be elected if the company

uses straight voting?

b. How much will it cost you if the company uses cumulative voting?

Question 2.

Fields, Incorporated, has the following book value balance sheet:

Assets Total Debt and Equity

Current

assets

$ 135,000,000 Total debt $ 274,000,000

Equity

Common stock $ 45,000,000

Capital surplus 76,000,000

Net fixed

assets

425,000,000

Accumulated retained

earnings

165,000,000

Total shareholders' equity $ 286,000,000

Total assets $ 560,000,000

Total debt and shareholders'

equity

$ 560,000,000

a. What is the debt-equity ratio based on book values?

b. Suppose the market value of the company's debt is $275.5 million and the market

value of equity is $680 million. What is the debt-equity ratio based on market values?

Question 3

New Business Ventures, Incorporated, has an outstanding perpetual bond with a

coupon rate of 12 percent that can be called in one year. The bond makes annual

coupon payments and has a par value of $1,000. The call premium is set at $145 over

par value. There is a 60 percent chance that the interest rate in one year will be 14

percent, and a 40 percent chance that the interest rate will be 9 percent. If the current

interest rate is 12 percent, what is the current market price of the bond?

Neil@UPMKB2024

2

Essay Questions

1. What are the differences between stock and debt?

2. Preferred stock doesn’t offer a corporate tax shield on dividend paid. Why do we

still observe some firms issuing preferred stock?

3. Identify the general rights that are commonly granted to common stock

shareholders.