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    Please show calculations/formulas for the first problem and please check my work on the last two problems and comment:


    O,Meara, Inc., plans to issue $6 million of perpetual bonds. The face value of each bond is $1,000
    The semi-annual coupon on the bonds is 4.5%
    Market interest rates on one-year bonds are 8%
    With equal probability, the long-term market interest rate will be either 12% or 16%
    next year. Assume investors are risk-neutral.

    a. If the O'Meara bonds are noncallable,what is the price of the bonds?

    b. If the bonds are callable one year from today at $1,250, will their price be greater than
    or less than the price you computed in (a)? Why?

    check the two below:

    a. Why do venture capital companies prefer to
    advance money in stages? If you were
    the management of Marvin Enterprises, would you have
    been happy with such an
    arrangement? With the benefit of hindsight did First
    Meriam gain or lose by advancing
    money in stages?
    b. The price at which First Meriam would invest more
    money in Marvin was not fixed
    in advance. But Marvin could have given First Meriam
    an option to buy more shares
    at a preset price. Would this have been better?
    c. At the second stage Marvin could have tried to
    raise money from another venture
    capital company in preference to First Meriam. To
    protect themselves against this,
    venture capital firms sometimes demand first refusal
    on new capital issues. Would
    you recommend this arrangement?

    Here is recent financial data on Pisa Construction,
    Stock price $40 Market value of firm $400,000
    Number of shares 10,000 Earnings per share $4
    Book net worth $500,000 Return on investment 8%
    Pisa has not performed spectacularly to date. However,
    it wishes to issue new shares to
    obtain $100,000 to finance expansion into a promising
    market. Pisa's financial advisers
    think a stock issue is a poor choice because, among
    other reasons, "sale of stock at a
    price below book value per share can only depress the
    stock price and decrease shareholders'
    wealth." To prove the point they construct the
    following example: "Suppose 2,500 new shares are
    issued at $40 and the proceeds are invested. (Neglect
    issue costs.)
    Suppose return on investment does not change. Then
    Book net worth _ $600,000
    Total earnings _ .08(600,000) _ $48,000
    Thus, EPS declines, book value per share declines, and
    share price will decline proportionately
    to $38.40."
    Evaluate this argument with particular attention to
    the assumptions implicit in the
    numerical example.

    A. Venture capital is a term to describe the financing
    of startup and early stage businesses as well as
    businesses in "turn around" situations. Venture
    capital investments generally are higher risk
    investments but offer the potential for above average
    returns. A venture capitalist (VC) is a person who
    makes such investments.
    Venture capitalists generally:

    * Finance new and rapidly growing companies;
    * Purchase equity securities;
    * Assist in the development of new products or
    * Add value to the company through active
    * Take higher risks with the expectation of higher
    * Have a long-term orientation

    When considering an investment, venture capitalists
    carefully screen the technical and business merits of
    the proposed company. Venture capitalists only invest
    in a small percentage of the businesses they review
    and have a long-term perspective. Going forward, they
    actively work with the company's management by
    contributing their experience and business savvy
    gained from helping other companies with similar
    growth challenges.

    Venture capitalists mitigate the risk of venture
    investing by developing a portfolio of young companies
    in a single venture fund. Many times they will
    co-invest with other professional venture capital
    firms. In addition, many venture partnerships will
    manage multiple funds simultaneously. For decades,
    venture capitalists has nurtured the growth of
    America's high technology and entrepreneurial
    communities resulting in significant job creation,
    economic growth and international competitiveness.
    Companies such as Digital Equipment Corporation,
    Apple, Federal Express, Compaq, Sun Microsystems,
    Intel, Microsoft and Genentech are famous examples of
    companies that received venture capital early in their

    MONEY IN STAGES in order to make a balance between
    risk and reward equation. Advancing money in stages as
    it brings more accountability and tracking of the
    performance diminishes the risks of the investor.
    Therefore First Meraim will be the gainer as there
    will be less risk associated with it. But if First
    Meriam is comfortable about the performance in future
    than it should invest earlier at lesser price.

    B. Marvin could have given the opportunity to First
    Meriam to buy at present price. This could have been
    better as it could have saved the part of the
    underwriting cost & the issue expenses. This could
    have instilled more confidence in the mind of the
    other investors.

    C. This arrangement can be done as it will give
    assurance to the First Meriam that they are the
    partners in the progress. It will be fair for the
    venture capital firms as they are taking high risks.


    The argument here is whether the shares should be
    issued below the book value or not!

    If we see the Market value per share is $40 and the
    new issue is also supposed to be at $40.
    It is unrealistic that one can issue more than $40 as
    then the investor will purchase from the market
    instead of taking from the corporation.
    Now the EPS declines because Book value per share is
    more than market value per share. Book value per share
    is $50.
    Therefore one has to see the practical market
    consideration also. The debt can also be issued if the
    interest cost is less than 8% i.e less than ROI. But
    the issuance of debt will increase the financial risk
    of the firm. Therefore the firm has to maintain the
    optimum ration between the two to increase the return
    to the shareholders.

    © BrainMass Inc. brainmass.com March 4, 2021, 6:49 pm ad1c9bdddf

    Solution Preview

    a. If the O, Meara bonds are noncallable, what is the price of the bonds?

    The price of the bond today would be the discounted sum of the cash flows to the investor. The cash flow to the investor are the coupon interest and the price of the bond one year from today. The interest amount is $45 every six months. The price of the bond at the end of 1 year would depend on the interest rate. For a perpetual bond, the price is coupon rate/interest rate. The price could be 45/.06=750 or 45/.08=562.5. $45 is the semiannual coupon and the interest rate is divided by 2 for semi annual. Since both the interest rates have equal probability, the expected price, end of the year, would be0.5X750+0.5X562.5 = 656.25.
    We discount these cash flows to get the price today. The interest is semi annual so
    we discount at 4% ( half of 8% the annual rate).
    The price today would be 45/(1.04) + 45/(1.04)^2 + ...

    Solution Summary

    The solution has three problems- 1. Issue price of perpetual bonds, 2. Venture capital investments and 3. EPS and stock issue.