Blake Corporation, a Delaware corporation, has three classes of…Blake Corporation, a Delaware corporation, has three classes of capital participants. First, there are bondholders. The total principal amount of the entire class of bonds is $250 Million. The coupon rate for the bonds is 4% payable annually, and they mature in 2042. Second, there are holders of cumulative 5% preferred stock. Each preferred share has a par value of $100. The par value of the entire class of preferred stock is $200 Million. There are $10 Million in cumulative dividend arrearages. The liquidation preference for the preferred stock is par value plus cumulative dividend arrearages. Third, there is a single class of common stock. There are a total of 1,000,000 common shares issued and outstanding. The common shares have no par value. They are the only shares that have any voting rights, beyond those mandated by Delaware corporate law. At the beginning of 2022, due to certain sudden negative changes in the overall economic landscape, the market value of Blake Corporation’s assets has fallen to $300 Million. Now, the corporation has been presented with exactly three options, and the board must select between them. For purposes of this exam, do not introduce other options other than the three described here. The first option is to liquidate Blake Corporation. The second option is an opportunity to invest in a new R&D project for $300 Million. If the project succeeds, the project will be worth $1,100 Million in one year. If it fails, the project will be worthless. Whether the project is a success will be known definitively in one year. The probability of the project succeeding is 50%. The following information may be useful in considering this second option. The risk-free rate of return on one-year treasuries is 2%. The return on a market-representative basket of investments is 6%. The beta for the bonds is 0.5, the beta for the preferred stock is 2.0, and the beta for the common stock is 5.5. The third option is to accept an offer of a merger between Blake Corporation and a subsidiary of Atkinson Corporation. Atkinson Corporation has a much higher net asset value than does Blake Corporation. The terms of the proposed merger are that a newly formed subsidiary of Atkinson Corporation would merge with and into Blake Corporation. In the end, Atkinson Corporation would hold all of the common stock of Blake Corporation. Each pre-merger common share of Blake Corporation would be converted into 0.5 shares of Atkinson Corporation common stock, worth approximately $10.00 at the time of the conversion. Blake Corporation preferred stock would convert into new Blake Corporation bonds at a rate of 20 preferred shares converting into a bond with a face amount of $1,000. The bonds would have a coupon rate of 9% and would mature in 2047. The original Blake Corporation bonds that were outstanding before the merger would remain outstanding. Answer each of the following questions. II(a). 25 Points Based on information pertinent to financial valuation presented above, what judgment can you make as to how much value each of the options presents to each of the three classes of investors? Use that analysis to predict what position each class of investors would likely take with respect to which option should be pursued. II(b). 25 Points The board of directors of Blake Corporation has asked you to advise it on what course it should take, bearing in mind its obligations under Delaware corporate law. What are the issues you would want to address and what advice would you give? What legal mechanisms we have studied, if any, might limit the ability to undertake any of these options? What strategies might the Blake Corporation board of directors use to overcome those limitations? LawSocial ScienceTax law LAW 301
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