Question

E13-8

ockholders and *** Whether FREE d are to other sockhol கனவiya the following stockholders' Corporation 11)-2 d her enger Corporation Stockholders' Equity theranda, encept whare mot proble pede parale shares her 000 shares issued din capital ack at cost, 10.000.common shares ha de equity r Le t Toal December 31, Rapid Determine the number of shares Gemminger had outstandin Determine the average issue price of Gemminger's common stock vidend of 1934 owner of one share E13-3 Refer to EL Assume that Gemminger declares a total cash divid both common and preferred stock. Determine the amount that an Gemminger's common stock will receive E13-4 Refer to E13-2. Assume that Gemminger reissues 1,000 shares of the tre e treasury stocka per share Required: Prepare the journal entry made for the reissuance of the treasury stock b. Determine the impact of the reissuance on Gemminger's total assets and ts and total equity (E13-5 During 2002. Janney Corp. had $2,000,000 of 596 convertible bonds outste bonds may be converted into a total of 40,000 shares of common stock Th. stock is currently selling for $30 per share. The company's tax rate is 40%. What merator and denominator effect of the convertible bonds when computing dil ings per share? outstanding. The stock. The common pon. What is the outing diluted earn E13-6 During 2002, Bunneymen Echo Chambers Inc, had 2,000 common stock ontine standing. Each option may be used to purchase one share of common stock at si share. The common stock sold at an average price of $25 per share during 2002. What be the effect of the stock options on the company's basic and diluted earnings per share during 2002? On December 31, 2004, Case, Inc. had 300,000 shares of common stock issued and out standing. Case issued a 10% stock dividend on July 1, 2005. On October 1, 2005, Case purchased 24,000 shares of its common stock for the treasury and recorded the purchase by the treasury stock method. What is the number of shares that should be used in com- puting earnings per share for the year ended December 31, 2005? E13-8 On May 10, 2001, The Wall Street Journal reported: Verizon Communications sagged $1.78 to $53.82. The telecommunications ser- vice concern unveiled one of the largest convertible debt issues ever, a $3 billion offering of zero-coupon notes.

Answer 1

E 13-8:

The primary reason why the stock market would have such a negative reaction to Verizon’s ability to raise $3 billion in financing is because of the fact that raising money through debt instruments like zero-coupon notes poses enormous risk to the shareholders.

The risk to the shareholders was due to a wrinkle in the tax code which enabled Verizon to benefit from huge tax savings by deducting far more interest than the amount that it is actually paying. The condition with these zero-coupon notes was that Verizon will have to pay 0.25% annual interest on its $3 billion in zero bonds if its stock price falls below 60% of the issue's conversion price. Thus through these zero-coupon notes Verizon was able to not only raise cheap money but also do tax arbitrage as well. On the flipside this increased the risk for the company’s shareholders and the increasing debt ratio (i.e. total liabilities/total equity) signals a falling power of the company to pay its debts. Thus the blind optimism associated with the use of debt instruments increased the risk for Verizon’s shareholders and this was the main reason behind the stock market’s negative reaction to its issue of zero-coupon notes.