Jet Corporation currently has 120,000 shares outstanding that are selling at $55 per share. It needs to raise $800,000. Net income after taxes is $400,000. Its vice president of finance and its investment banker have decided on a rights offering, but are not sure how much to discount the subscription price from the current market value. Discounts of 12 percent, 22 percent, and 42 percent have been suggested. Common stock is the sole means of financing for the Jets Corporation. a. For each discount, determine the subscription price, the number of shares to be issued, and the number of rights required to purchase one share. (Round to one place after the decimal point where necessary.) b. Determine the value of one right under each of the plans. (Round to two places after the decimal point.) c. Compute the earnings per share before and immediately after the rights offering under a 10 percent discount from the market price. d. By what percentage has the number of shares outstanding increased? e. Stockholder X has 100 shares before the rights offering and participated by buying 20 new shares. Compute his total claim to earnings both before and after the rights offering (that is, multiply shares by the earnings per share figures computed in part c). f. Should Stockholder X be satisfied with this claim over a longer period of time?
Part 2 Jets Corporation had finally arrived at the point where it had a sufficient excess cash flow of $4.0 million to consider paying a dividend. It had 2.5 million shares of stock outstanding and was considering paying a cash dividend of $1.40 per share. The firmĂ˘â‚¬â„˘s total earnings were $10 million, providing $4.00 in earnings per share. The stock traded in the market at $78.00 per share. However, Al Rosen, the chief financial officer, was not sure that paying a cash dividend was the best route to go. He had recently read a number of articles in The Wall Street Journal about the advantages of stock repurchases and before he made a recommendation to the CEO and board of directors, he decided to do a number of calculations. a. What is the firmĂ˘â‚¬â„˘s P/E ratio? b. If the firm paid the cash dividend, what would be its dividend yield and dividend payout ratio per share? c. If a stockholder held 100 shares of stock and received the cash dividend, what would be the total value of his portfolio (stock plus dividends)? d. Assume instead of paying the cash dividend, the firm used the $4.0 million of excess funds to purchase shares at slightly over the current market value of $78 at a price of $79.60. How many shares could be repurchased? (Round to the nearest share.) e. What would the new earnings per share be under the stock repurchase alternative? (Round to three places to the right of the decimal point.) f. If the P/E ratio stayed the same under the stock repurchase alternative, what would be the stock value per share? If a stockholder owned 100 shares, what would now be the total value of his portfolio? (This answer should be approximately the same as the answer to part c.)
Small Research Project 1 Using an airline of your choice (Delta), research its company stock. Then prepare a presentation on: a. Recent price, 52-week high, 52-week low, 52-week price percentage change, volume. b. How has the stock performed over a 5-year time period? c. What has happened to the P/E ratio and can you give a reason it has changed? d. How has the dividend grown over time? Would this have an impact on the observation in question 3? e. What has happened to the annual earnings per share? f. How has the dividend changed, and how might this be impacted by the growth in earning per share? g. Based on your findings, make some generalizations about whether it would be more advantageous and less costly for the airline to issue bonds or stocks to finance the purchase of new aircraft.
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