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c 

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 
   
   
    
   
  


? ×? ??  ??
? ?  ?? ?  ?? ? ? ?? ??
  ????? ? ?? ?  ????? ??
??? ????
Flotation costs include both the underwriting spread and the costs incurred by the
issuing company from the offering.
Underwriting costs & fees= \$357,000 + 63,000= 420,000 (page 31)
External funds= 8,355,000 (page 31)
Total Flotation costs as a percentage of external funds raised: 420,000/8,355,000= £ 

? ? ?? ???? ??? ?? ?  ?

  ?
?  ???  ?? ? ??  ?! ?" ?!?#?
\$ ????  ?
?
c  c 

 £ \$ 3.50 \$ 0.18
  \$ 7.00 \$ 0.70
 £ \$ 12.50 \$ 4.38
 £ \$ 13.90 \$ 4.87
  \$ 19.40 \$ 1.94
 £ \$ 22.90 \$ 1.15
\$ 13.20

\$ 13.20 \$ 8.50 \$ 4.70

\$ 4.70 £
150,000

Calculations were found by the following:

Multiplied probability by probable price, summed it, and subtracted the price they
originally paid per share which was \$8.50, then took that difference and multiplied it by the
number of shares Parks, Van Buren & Co. own which is 150K. That equal \$705,000 which is the
dollar benefit Parks, Van Buren & Co. could expect from the options package.)
? Ô ??? ??? ? ? ?? ???
? ? ? ???  ?
?
c      
 \$ 705,000 \$7,845,000 \$392,250
£ \$ 63,000 \$455,250
£££ \$ 9,480,000 4.80%

Calculations were found by the following:

Added \$705,000 to \$7,140,000 which equals \$7,845,000, 5% of that is \$392,250, add the additional
\$63K from page 31 Table 2 which equals \$455,250, Add 705K from part a to \$8755000 which equals
\$9,480,000 which would be the new Public Stockholders total amount, then divide \$455,250 by
\$9,480,000 which equals 4.80%)

 ? \$? ?? ? ? ? ?%& ?? ? ?'(? ?) ? ?
?? ?? ??%
?* ?? ? ?? ??+,? ?
 ? ? ?? ????
Îe have considered the public paying \$8.50 per share while Aberwald, Butler, Van Buren &
Co. will be paying \$1.00 per share. Îe feel the public need not know our employees price per share
since personal employee contract are not public. Giving that information would be irrelevant to the
public. Îe also considered that fact that the price differential could be the result of stock options in
their contracts.

 ? ? ??? ??-?? ?  ?! ?" ?!?#?\$ ? ? ?
? ?? ? ?%
?? ?
Îe believe that Aberwald, Butler, Van Buren Company should be allowed to purchase
its shares at \$1.00 per share. If the Precision Tool Company believes that \$1 is too low to sell the
securities to the underwriter, the shares should at least be sold at a discount. The investment
bank should not buy the shares at the same price of the public. Since there is only one
underwriter for the company they take on all of the risk associated with buying and reselling the
securities. Even if the securities don͛t sell, Precision Tool Company is still guaranteed the funds.
Since the investment bank is purchasing almost the same amount of shares as the owners they
should be entitled to a discount. By having the investment bank sell their company shares it
makes the stock more marketable.

? ×?? ? ?? ??? ?'(?#?) ? ? ?  ? ????

? ???? ?? ? ? ?? ?????
 ?
By entering into a partnership agreement, Rodriguez and Fulton will each own half of
the company. They will share the debts and liabilities of the company as well as the profits. A
partnership offers tax advantages for the company because they will only be taxed once at a
personal level.

ÿ ? Ë? ??? ??? ?? ?? ? ? ? ????

?? . ?? ? ??? ??? ???? ? ??
?
?
c
Guaranteed funds for when they want to use it for acquisitions

needed money

Create a more liquid company which would be more attractive to

potential investors

a? Too much cash on the Balance Sheet

a? Possible investors would question the management efficiency

and their use of cash

a? Inflation (\$1 today is worth more than a \$1 tomorrow) Since

the cash would be worth more now the company could benefit
more from possible expansion or growth opportunities

a? Forgoing any return or interest earned because they are just

holding the cash rather than investing it

º? ×?/???0? ? ?   ?

%ÿ? ??+? ,? ?.? ?
&1?? ?
? \$?? ?? ??
???? ?   ?
?
      
  
Precision Tool Company
Income Statement
For the year ended December 31, 1993
 14,135,000
  (7,976,097)
 ! " 6,158,903
 #   \$%& 1,945,900
U \$%& 600,000
& 
 850,000
\$'( 2,763,003
'  \$%& (850,000)
\$( 1,913,003
(%   (765,201.20)
 '
 \$1,147,801.80

      )" *+ 
Precision Tool Company
Income Statement
For the year ended December 31, 1993
 14,135,000
  (7,976,097)
 ! " 6,158,903
 #   \$%& 1,945,900
U \$%& 600,000
& 
 850,000
\$'( 2,763,003
'  \$%& (1,930,000)
\$( 833,003
(%   333,201.2
 '
 \$499,801.80

Calculations:
   
Sales: 12,850,000*.10=1285000
12,850,000+1,285,000=14,135,000
COGS: 7,251,000/ 12,850,000=.56428
14,135,000*.56428= 7,976,097
G/A Expenses: 1769000/12,850,000=.137665
Tax rate=40% (page 30)

   
Sales: 12,850,000*.10=1285000
12,850,000+1,285,000=14,135,000
COGS: 7,251,000/ 12,850,000=.56428
14,135,000*.56428= 7,976,097
G/A Expenses: 1769000/12,850,000=.137665
14,135,000*.137665=1,945,900
Interest Expense: 6,000,000*.18= 1,080,000
1,080,000+850,000=1,930,000
Tax rate=40% (page 30)
?  ? ??22 ?? ? ? ? ? ? ?
 ?? ?  ?
   
Times-Interest-Earned: EBIT/Total Interest= 2,763,003/850,000=  £
Fixed Charge Coverage: same as tie?
Cash Flow Coverage: net income + depreciation and amortization/total debt payments=
(1,147,801.80+850,000)/

   
Times-Interest-Earned: EBIT/Total Interest= 2,763,003/1,930,000=  
Fixed Charge Coverage: same as tie?
Cash Flow Coverage: net income + depreciation and amortization/total debt payments=
(499,801.80+850,000)/

&? ×? ? ?'(?#?) ? ?? ?) ???  ???? ?
? ?  ? ? ? ??
Rodriguez and Fulton should

 ? ?? ? ?  ? ? ??? ?%? ?? ?  ????
 ?? ? ? ? ?? ? ?
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??  ? ??? ?
?
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???

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?
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??0?

? ?

-+ ?.(
?\$)?'%? ?((? ?'\$? 1??
 )2-3? ?3))?4?53  %
)6 ? /+ ) ) ) ? /+ )  + (??

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+7)?*( ?  ??

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+7)?*( ?  ?0?

Ô   ?? ?8)) )?

??!?

? 09?

Îe were told in the question that the company will be using a total debt of \$3 million. Îe used this
number for the numerator and found total assets of 11,612,000 on the company͛s balance sheet.
Since the ratio is below one it is not considered to be in good financial standing. The company may not
be able to pay its debt with their assets.

×

 ? ?'???%ÿ? ? ?  ?? ? ? ? ? ?? ?? ?
 ??

?? ? ? ??
?

Times-Interest-Earned: EBIT/Total Interest

1=SALES-7,976,097-1,945,900-600,000-850,000 / 1,930,000
1= SALES -4,580,197 / 1,930,000
1*1,930,000= SALES ʹ 4,580,197
1,930,000=SALES ʹ 4,580,197
+4,580,197
£ , U\$

In order to find the sales amount when TIE = 1, I set the equation equal to 1 and solved for sales. I took
the variable (sales) and subtracted COGS, Expenses and Depreciation to get Sales-4,580,197. I then just
solved the equation.