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    Bonds and Dividends

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    Corporate Bonds

    13-1 The initial proceeds per bond, the size of the issue, the initial maturity of the bond, and the years remaining to maturity are shown in the following table for a number of bonds. In each case, the firm is in the 40 percent tax bracket, and the bond has a $1,000 par value.

    Bond Proceeds per Size of Initial Maturity Years Remaining
    Bond Issue of Bond to Maturity
    A $985 10,000 bonds 20 Years 15 years
    B 1,025 20,000 25 16
    C 1,000 22,500 12 9
    D 960 5,000 25 15
    E 1,035 10,000 30 16

    A. Indicate whether each bond was sold at a discount, at a premium, or at its par value.
    B. Determine the total discount or premium for each issue.
    C. Determine the annual amount of discount or premium amortized for each bond.
    D. Calculate the unamortized discount or premium for each bond.
    E. Determine the after-tax cash flow from the unamortized discount associated with the retirement now of each of these bonds, using the values developed in part (d).

    Dividend Fundamentals

    14-1 Beta Corporation has the following shareholders' equity accounts:
    Common Stock at par $5,000,000
    Paid-in capital in excess of par 2,000,000
    Retained earnings 25,000,000
    Total stockholders' equity $32,000,000

    A. What is the maximum amount that Beta Corps. Can pay in cash dividends, without impairing its legal capital, if it is headquartered in a U.S. state where capital defined as the par value of common stock?
    B. What is the maximum amount that Beta Corps. Can pay in cash dividends, without impairing its legal capital, if it is headquartered in a U.S. state where capital defined as the par value of common stock, plus paid in capital in excess par?

    14-3 Delta Corps earned $2.50 per share during fiscal year 2008 and paid cash dividends of $1.00 per share. During the fiscal year that just ended on December 31, 2009, Delta earned $3.00 per share, and the firm's managers expect to earn this amount per share during fiscal years 2010 and 2011, as well.

    A. What was Delta's payout ratio for fiscal year 2008?
    B. If Delta's managers want to follow a constant nominal dividend policy, what dividend per share will they declare for fiscal year 2009?
    C. If Delta's managers want to follow a constant payout ratio dividend policy, what dividend per share will they declare for fiscal year 2010?
    D. If Delta's managers want to follow a partial-adjustment strategy, with a target payout ratio equal to FY 2008's, how could they change dividend payments during 2009, 2010, 2011?

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    Solution Preview

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    Corporate Bonds

    13-1 The initial proceeds per bond, the size of the issue, the initial maturity of the bond, and the years remaining to maturity are shown in the following table for a number of bonds. In each case, the firm is in the 40 percent tax bracket, and the bond has a $1,000 par value.

    Bond Proceeds per Size of Initial Maturity Years Remaining
    Bond Issue of Bond to Maturity
    A $985 10,000 bonds 20 Years 15 years
    B 1,025 20,000 25 16
    C 1,000 22,500 12 9
    D 960 5,000 25 15
    E 1,035 10,000 30 16

    A. Indicate whether each bond was sold at a discount, at a premium, or at its par value.

    A bond is sold at a discount is the proceeds are less than the par value. If the proceeds are greater than the par value, the issue is at a premium.
    Bond A - discount as 985<1,000
    Bond B - premium as 1,025>1,000
    Bond C - par as the face value is $1,000
    Bond D - discount as 960<1,000
    Bond E - premium as 1,035>1,000

    B. Determine the total discount or premium for each issue.

    Total discount or premium = discount or premium per bond X number of bonds
    Discount per bond = 1,000-issue price
    Premium per bond = Issue price - 1,000
    Disc/Premium Number of Total Disc
    Per bond Bonds Premium
    Bond A - discount 15 10,000 150,000
    Bond B - ...

    Solution Summary

    The solution has three questions dealing with bonds and dividend calculations

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