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Pure Bond Value, Conversion Value Etc.

13.) Pittsburgh Steel Company has a convertible bond outstanding, trading in the marketplace at $930. The par value is $1,000, the coupon rate is 8 percent, and the bond matures in 25 years. The conversion price is $50 and the company's common stock is selling for $44 per share. Interest is paid semiannually.

a. What is the conversion value?
b. If similar bonds, which are not convertible, are currently yielding 10 percent, what is the pure bond value of this convertible bond?

14.) In problem 13, if the interest rate on similar bonds, which are not convertible, goes up from 10 percent to 12 percent, what will be the new pure bond value of the Pittsburgh Steel Company bonds? Assume the Pittsburgh Steel Company bonds have the same coupon rate of 8 percent as described in problem 13 and that 25 years remain to maturity. Use semiannual analysis.

15.) The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Based on the following facts, is she correct? (Show calculations to prove your answer.)

Debt can be issued at a yield of 10.6 percent, and the corporate tax rate is 35 percent. Preferred stock will be priced at $50, and pay a dividend of $4.40. The floatation cost on the preferred stock is $2.

Solution Preview

13.) Pittsburgh Steel Company has a convertible bond outstanding, trading in the marketplace at $930. The par value is $1,000, the coupon rate is 8 percent, and the bond matures in 25 years. The conversion price is $50 and the company's common stock is selling for $44 per share. Interest is paid semiannually.

a. What is the conversion value?

The converion price is $50 and the par value of the bond is $1000. The numbr of shares issued would be 1000/50=20. The current price of common stock is $44. The conversion value is 20x44=$880

b. If similar bonds, which are not convertible, are currently yielding 10 percent, what is the pure bond value of this convertible bond?

For this we have to the the Present Value of the interest and principal. The interest amount is 1,000X8%=$80 and since interest is paid semi ...

Solution Summary

The solution explains the calculation of 3 questions on conversion value for convertible securities and valuation of fixed income securities.

$2.19