378 Part Four Financing Decisions and Market Efficiency
bre44380_ch14_355-378.indd 378 09/11/15 07:56 AM
- Tax In 2015 Beta Corporation earned gross profits of $760,000.
a. Suppose that it is financed by a combination of common stock and $1 million of debt.
The interest rate on the debt is 10%, and the corporate tax rate is 35%. How much profit is
available for common stockholders after payment of interest and corporate taxes?
b. Now suppose that instead of issuing debt Beta is financed by a combination of common
stock and $1 million of preferred stock. The dividend yield on the preferred is 8% and the
corporate tax rate is still 35%. How much profit is now available for common stockholders
after payment of preferred dividends and corporate taxes? - Corporate debt Which of the following features would increase the value of a corporate
bond? Which would reduce its value?
a. The borrower has the option to repay the loan before maturity.
b. The bond is convertible into shares.
c. The bond is secured by a mortgage on real estate.
d. The bond is subordinated. - The financial crisis Construct a time line of the important events in the financial crisis
that started in the summer of 2007. When do you think the crisis ended? You will probably
want to review some of the entries under Further Reading before you answer. - The financial crisis We mention several causes of the financial crisis. What other causes
can you identify? You will probably want to review some of the entries under Further Read-
ing before you answer.
CHALLENGE- Majority voting The shareholders of the Pickwick Paper Company need to elect five direc-
tors. There are 200,000 shares outstanding. How many shares do you need to own to ensure
that you can elect at least one director if (a) the company has majority voting? (b) it has cumu-
lative voting? - Use data from finance.yahoo.com to work out the financing proportions given in Figure 14.1
for a particular industrial company for some recent year. - The website http://www.federalreserve.gov/releases/z1/current/default.htm provides data on
sources of funds and an aggregate balance sheet for nonfarm nonfinancial corporations.
Look at Table F.102 for the latest year. What proportion of the cash that companies needed
was generated internally and how much had to be raised on the financial markets? Is this
the usual pattern? Now look at “new equity issues.” Were companies on average issuing new
equity or buying their shares back? - An aggregate balance sheet for U.S. manufacturing corporations can be found on http://www.
census.gov/econ/qfr. Find the balance sheet for the latest year. What was the ratio of long-
term debt to long-term debt plus equity? What about the ratio of all long-term liabilities to
long-term liabilities plus equity?
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