ABC Company is experiencing financial difficulty and is negotiating debt restructuring with its creditors to relieve its financial stress. ABC has a P2,500,000 noted payable to XYZ Bank. The bank is considering acceptance of an equity interest in ABC Company in the form of 200,000 ordinary shares valued at P12 per share. The par value is P10 per share. How much share premium should be recognized from the debt restructuring? Group of answer choices a. 500,000 b. 100,000 c. 0

ABC Company is experiencing financial difficulty and is negotiating debt restructuring with its creditors to relieve its financial stress. ABC has a P2,500,000 noted payable to XYZ Bank. The bank is considering acceptance of an equity interest in ABC Company in the form of 200,000 ordinary shares valued at P12 per share. The par value is P10 per share. How much share premium should be recognized from the debt restructuring? Group of answer choices a. 500,000 b. 100,000 c. 0

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 11P: The Rivoli Company has no debt outstanding, and its financial position is given by the following...

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General Electric Capital, a division of General Electric, uses long-term debt extensively. In a recent year, GE Capital issued 11 billion in long-term debt to investors, then within days filed legal documents to prepare for another 50 billion long-term debt issue. As a result of the 50 billion filing, the price of the initial 11 billion offering declined (due to higher risk of more debt). Bill Gross, a manager of a bond investment fund, denounced a lack in candor related to GEs recent debt deal. It was the most recent and most egregious example of how bondholders are mistreated. Gross argued that GE was not forthright when GE Capital recently issued 11 billion in bonds, one of the largest issues ever from a U.S. corporation. What bothered Gross is that three days after the issue the company announced its intention to sell as much as 50 billion in additional debt, warrants, preferred stock, guarantees, letters of credit and promissory notes at some future date. In your opinion, did GE Capital act unethically by selling 11 billion of long-term debt without telling those investors that a few days later it would be filing documents to prepare for another 50 billion debt offering? Source: Jennifer Ablan, Gross Shakes the Bond Market; GE Calms It, a Bit, Barrons, March 25, 2002.
Southwestern Wear Inc. has the following balance sheet: The trustees costs total 281,250, and the firm has no accrued taxes or wages. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of 2.5 million is received from sale of the assets?
Suppose IWT has decided to distribute $50 million, which it presently is holding in liquid short-term investments. IWT’s value of operations is estimated to be about $1,937.5 million; it has $387.5 million in debt and zero preferred stock. As mentioned previously, IWT has 100 million shares of stock outstanding. Assume that IWT has not yet made the distribution. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Now suppose that IWT has just made the $50 million distribution in the form of dividends. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Suppose instead that IWT has just made the $50 million distribution in the form of a stock repurchase. Now what is IWT’s intrinsic value of equity? How many shares did IWT repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic stock price per share after the repurchase?
ABC Company is experiencing financial difficulty and is negotiating debt restructuring with its creditors to relieve its financial stress. ABC has a P2,500,000 noted payable to XYZ Bank. The bank is considering acceptance of an equity interest in ABC Company in the form of 200,000 ordinary shares valued at P12 per share. The par value is P10 per share. How much share premium should be recognized from the debt restructuring? Group of answer choices a. 500,000 b. 100,000 c. 400,000 d. 0
Seal Company is experiencing financial difficulty and is negotiating debt restructuring with its creditor to relieve its financial stress. Seal has a P2,500,000 note payable to United Bank. The bank accepted an equity interest in Seal Company in the form of 200,000 ordinary shares quoted at P12 per share. The par value is P10 per share. The fair value of the note payable on the date of restructuring is P2,200,000. What amount should be recognized as share premium from the issuance of the shares? a. 500,000 b. 100,000 c. 400,000 d. 200,000
Seal Company is experiencing financial difficulty and is negotiating debt restructuring with its creditor to relieve its financial stress. Seal has a P2,500,000 note payable to United Bank. The bank accepted an equity interest in Seal Company in the form of 200,000 ordinary shares quoted at P12 per share. The par value is P10 per share. The fair value of the note payable on the date of restructuring is P2,200,000. What amount should be recognized as gain from debt extinguishment as a result of the "equity swap”? a. 400,000 b. 100,000 c. 500,000 d. 200,000
Swindle Company is experiencing financial difficulty and is negotiating debt restructuring with its creditor to relieve its financial stress. Swindle has a $3,500,000 bank loan payable with Love Bank. The bank accepted an equity interest in Swindle Company in the form of 300,000 ordinary shares quoted at $12 per share. The par value is $10 per share. The fair value of the bank loan payable on the date of restructuring is $3,200,000. What amount should be recognized as gain from debt extinguishment as a result of the equity swap?
Appliances, Inc. has no debt outstanding, and its financial position is given by the following data: Assets (market value = book value) $5,000,000 EBIT $800,000 Cost of equity 12% Stock price $10 Shares outstanding 500,000 Tax rate 25% The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 20% debt based on market values, its cost of equity will increase to 13% to reflect the increased risk. Bonds can be sold at a cost of 6%. Appliance, Inc. is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time. As a creditor, you are concerned about the company’s ability to repay its debt and interest. What is the new times interest earned?
A company is experiencing financial difficulty and is negotiating a trouble debt restructuring with its creditors for its P6,000,000 note payable. The bank accepted an equity interest from the company in a form of 200,000 ordinary shares. The fair value of ordinary shares is P20 per share. What is the amount of gain on debt restructuring to be reported by the company in its profit or loss?
Shadow, Inc., is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $4.5 million worth of debt outstanding. The cost of this debt is 8 percent per year. Shadow expects to have an EBIT of $1.8 million per year in perpetuity. Shadow pays no taxes. (1) What is the market value of Shadow, Inc. before and after the repurchase announcement? (2) What is the expected return on the firm’s equity before the announcement of the stock repurchase plan?
Executive Cheese has issued debt with a market value of $100.56 million and has outstanding 15.60 million shares with a market price of $10 a share. It now announces that it intends to issue a further $55.44 million of debt and to use the proceeds to buy back common stock. Debtholders, seeing the extra risk, mark the value of the existing debt down to $60 million. c-1. What is the market value of the firm (equity plus debt) after the change in capital structure? (Do not round intermediate calculations. Enter your answer in millions. Round your answer to 2 decimal places.) d. What is the debt ratio after the change in structure? (Do not round intermediate calculations. Round your answer to 2 decimal places.) e. Who (if anyone) gains or loses?
In the Enron case, the company eventually turned to “back-door” guaranteeing of the debt of Chewco, one of its SPEs, to satisfy equity investors. Assume that a $16 million loan agreement required that Enron stock should not fall below $40 per share. If the share price did decline below that trigger amount, either the loan would be called by the bank or the bank could choose to increase the guaranteed number of Enron shares based on the new price (assume $32). If the bank decides to increase the number of shares guaranteed, what would be (1) the original number of shares in the guarantee and (2) the new number of shares? Why would it be important from an accounting and ethical perspective for Enron to disclose information about the guarantee in its financial statements?