This section is from the book "Problems In Private Finance", by Charles W. Gerstenberg. See also: The Private Equity Edge: How Private Equity Players and the World's Top Companies Build Value and Wealth.
1. Where is the "after-acquired"clause in the Jones-Laughlin mortgage? What is the purpose and effect of this clause?
2. Public Utility Co. X has outstanding a $5,000,000 closed-end mortgage. It wants to extend its property into new territory, and expects to spend $1,000,000 a year for 12 years. Its average annual surplus, after payment of 5 per cent dividends on its stock, amounts to about $200,000. Show by diagram and explanation how the company can best finance the extension: (a) Assuming that the $5,000,000 mortgage has no "after-acquired"clause, (b) Assuming that it has an "after-acquired"clause?
3. Explain and give the reasons for the statement contained in the last sentence on p. 929, beginning "This policy,"etc.
4. Briefly explain the content and purposes of the agreements on pages 299-312 and pages 313-19.
5. What is the security behind the "Equipment Notes"(pp. 301-303), and to what sources may the noteholders look for payment each year?
6. Show by diagram the amount of bonds outstanding from year to year, and the value of the cars year by year, assuming they depreciate to a junk value of $80,000 over a period of 20 years. Does the equity increase or decrease each year?
7. Can you suggest other kinds of businesses that could finance acquisitions through the issuance of similar notes?.
8. The N. Y., N. H. and H. R. R. Company guarantees the interest on the bonds of the N. Y. W. and B. Ry. Company (pp. 751-752). Is the amount to be paid by the N. Y., N. H. and H. R. R. Company a fixed charge of that company? If not, under what circumstances would it be?
9. What is the security behind the bonds of the Mortgage Bond Company? (pp. 255-290.)
10. Suggest other kinds of companies by which this method of financing may be used to advantage.
11. Which is the better form of collateral to secure collateral trust bonds - stock or bonds? Give reasons.
12. What provision is contained in the Jones-Laughlin mortgage protecting the bondholders against a dissipation of the surplus of subsidiary companies whose stock is held by the Jones-Laughlin Company as security for the bondholders? (p. 214.)
13. Company A obtained control of Company B by exchanging for the latter's stock an equal amount ($5,000,000) of collateral trust bonds. At the time the transfer took place, the B Company had a surplus of $1,000,000. What provisions do you think ought to be included in the collateral-trust agreement to protect the bondholders against a dissipation of this surplus?
14. What provisions are contained in the Jones-Laughlin mortgage protecting the bondholders against manipulation of the sub-sidiarv companies? (pp. 206-209; 219; 225.)
15. Corporations A, B and C have, respectively, 6, 12 and 24 directors. Each corporation has provision for cumulative voting. They are capitalized as follows: A, $12,000,000 com.; B, $12,000,000 com., $12,000,000 p'f'd; C, $18,000,000 com., $12,-000,000 p'f'd non-voting. Stock of Co. A is selling at 80; of Co. B at 60 for com. and 100 for p'f'd; of C, 70 and 50, respectively. With what minimum investment could you get control of the entire system? Explain how you could finance the acquisition.
16. What advantage does the parent company (for example, the Bethlehem Steel Corporation) obtain by guaranteeing a subsidiary company's (i.e., Fore River Shipbuilding Corporation) bonds?
17. Would it not be more advantageous for the parent company to sell its own bonds?
18. Suppose that a subsidiary of the Jones-Laughlin Steel Co. wanted to acquire property worth $500,000 and did not have sufficient accumulated earnings for this purpose; how could the acquisition be financed? (pp. 199 and 207.)