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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?

#### Solution Preview

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
Bond A - discount 15 10,000 150,000
Bond B - ...

#### Solution Summary

The solution has three questions dealing with bonds and dividend calculations

\$2.19

## Capital budgeting, cost of capital, issuing bonds, dividend

CORPORATE FINANCE. Eighth edition from: Ross. Westerfield. And Jaffe.
ISBN 978-0-07-310590-1
MHID 0-07-310590-2
Part of
ISBN 978-0-07-333718-0
MHID 0-07-333718-8

Please answer each of the following questions using the short answer format. The ideal responses for each question will be free of writing errors and must include academically valid course material citations in APA format to link responses to text concepts. Include a Reference page.

1. Explain the use of at least two financial decision-making techniques utilized in capital budgeting. What are at least one strength and weakness of each technique? The response may include the lease-versus-buy decision.

2. Select one approach to arriving at the cost of capital as it relates to the optimal capital structure of the corporation. Provide the rationale as to why this approach is applicable in certain situations.

3 Describe the similarities and differences in issuing bonds and stocks into the primary market.

4 Provide at least two different rationales with respect to an organization's dividend policy.

5 When do the following make sense for an organization and when do they not make sense (mergers, acquisition, and bankruptcy)?

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