Essay on Fin-516 Week 1 – Homework Assignment

590 Words3 Pages
FIN-516 WEEK 1 – HOMEWORK ASSIGNMENT

Problem Based on Chapter 14, Residual Dividends
Middlesex Plastics Manufacturing had 2011 Net Income of $15.0 Million. Its 2012 Net Income is forecast to increase by 8%. The company’s capital structure has been 35% Debt and 65% Equity since 2010, and the company plans to maintain this capital structure in 2012. The company paid $3.0 Million cash dividends in 2011. The company is planning to invest in a major capital project in 2012. The capital budget for this project is $12.0 Million in 2012. 1. If Middlesex increases its cash dividends in 2012 at the same rate of growth as its Net Income rate, what will be the total 2012 dividend payout in Dollars?
3,000,000 *1.08= 3,240,000

2.
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(Hint: A warrant’s exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.) 1) 20-25=-5, or 0 2) 25-25=0, so 0 3) 30-25=5, so 5 4) 100-25=75, so 75 * b.Assume the firm’s stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm’s straight bonds yield 12%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate, and dollar coupon, must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.) package = 1000
1000=vb + 50*3
Vb=850

850=I*1.74694+1000*.1037
850=I * 7.6494 +103.70
746.3= I (7.4694)
I =99.91
Round that up to 100
100=.10*1000
10% coupon interest rate
$100 dollar

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