Info

of same quality

9%

Maturity

20 years

Market price of stock

$55/share

a. What is the minimum price at which the convertible should sell?

b. What accounts for the premium of the market price of a convertible bond over the total market value of the common stock into which it can be converted?

11. Calculating Values for Convertibles You have been hired to value a new 30-year callable, convertible bond. The bond has an 8 percent coupon, payable annually, and its face value is $1,000. The conversion price is $70 and the stock currently sells for $50.

a. What is the minimum value of the bond? Comparable nonconvertible bonds are priced to yield 10 percent.

b. What is the conversion premium for this bond?

12. Calculating Warrant Values A bond with 30 detachable warrants has just been offered for sale at $1,000. The bond matures in 15 years and has an annual coupon of $110. Each warrant gives the owner the right to purchase two shares of stock in the company at $15 per share. Ordinary bonds (with no warrants) of similar quality are priced to yield 12 percent. What is the value of one warrant?

13. Option to Wait Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $180,000 per year. You believe the technology used in the machine has a 10-year life, in other words, no matter when you purchase the machine, it will be obsolete 10 years from today.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

V. Risk and Return

14. Options and Corporate Finance

© The McGraw-Hill Companies, 2002

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