Problem 1: The following companies have different financial statistics. What dividend policies would you recommend for them? Explain your reasons.
Mathews Co. Aaron Corp.
Growth rate in sales and earnings 5% 20%
Cash as a percentage of total assets 15% 2%
Problem 2: The Wallace Corporation has done very well in the stock market during the last three years?its stock has risen from $18 per share to $44 per share. Its current statement of net worth is:
Common stock (3 million shares issued at par value of $10 per share, 9 million shares authorized) $30,000,000
Paid-in capital in excess of par 15,000,000
Retained earnings 45,000,000
Net worth $90,000,000
a. What changes would occur in the statement of net worth after a two-for-one stock split?
b. What would the statement of net worth look like after a three-for-one stock split?
c. Assume Wallace Corporation earned $6 million. What would its earnings per share be before and after a two-for-one stock split and after a three-for-one stock split?
d. What would the price per share be before and after the two-for-one and the three-for-one stock splits? (Assume that the price-earnings ratio of 22 stays the same.)
e. Should a stock split change the price-earnings ratio for Wallace?
Problem 3: Defense Systems, Inc., has convertible bonds outstanding that are callable at $1,070. The bonds are convertible into 33 shares of common stock. The stock is currently selling for $39.25 per share.
a. If the firm announces it is going to call the bonds at $1,070, what action are bondholders likely to take and why?
b. Assume that instead of the call feature, the firm has the right to drop the conversion ratio from 33 down to 30 after 5 years and down to 27 after 10 years. If the bonds have been outstanding for 4 years and 11 months, what will the price of the bonds be if the stock price is $40? Assume the bonds carry no conversion premium.
c. Further assume that you anticipate that the common stock price will be up to $42.50 in two months. Considering the conversion feature, should you convert now or continue to hold the bond for at least two more months?
Problem 4: The Redford Investment Company bought 100 Cinema Corp. warrants one year ago and would like to exercise them today. The warrants were purchased at $24 each, and they expire when trading ends today (assume there is no speculative premium left). Cinema Corp. common stock is selling today for $50 per share. The exercise price is $30 and each warrant entitles the holder to purchase two shares of stock, each at the exercise price.
a. If the warrants are exercised today, what would the Redford Investment Company's dollar profit or loss be?
b. What is the Redford Investment Company's percentage rate of return?