Purchase Solution

A Call Decision With Convertible Bonds: United Technology Corporation

Not what you're looking for?

Ask Custom Question

I am having problems with where to even begin, If I had the first few steps defined this would greatly help.

United Technology Corporation (UTC) has $40 million of convertible bonds outstanding (40,000 bonds at $1,000 par value) with a coupon rate of 11 percent. Interest rates are currently 8 percent for bond of equal risk. The bonds have 15 years left to maturity. The bonds may be called at a 9 percent premium over par. They are convertible into 30 shares of common stock. The tax rate for the company is 25 percent. The firm's common stock is currently selling for $41 and it pays a dividend of $3.50 per share. The expected income for the company is $38 million with 6 million shares outstanding. Thoroughly analyze the bond and determine whether the firm should call the bond at the 9 percent call premium. In your analysis, consider the following:

a. The impact of the call on base and diluted earnings per share (assume the call forces conversion).

b. The consequences of your decision on financing flexibility.

c. The net change in cash outflows to the company as a result of the call and conversion.

Purchase this Solution
Solution Summary

A call decision with convertible bonds are examined.

Solution Preview

Hello

Please find the solution attached.

United Technology Corporation (UTC) has $40 million of convertible bonds outstanding (40,000 bonds at $1,000 par value) with a coupon rate of 11 percent. Interest rates are currently 8 percent for bond of equal risk. The bonds have 15 years left to maturity. The bonds may be called at a 9 percent premium over par. They are convertible into 30 shares of common stock. The tax rate for the company is 25 percent. The firm's common stock is currently selling for $41 and it pays a dividend of $3.50 per share. The expected income for ...

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
Recent Feedback
  • "ty i have more need help with"
  • "ty i have jmore i need help with"
  • "great help"
  • "excellent help"
  • "Very helpful and easy to understand."
Purchase this Solution
Free BrainMass Quizzes
Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Basics of corporate finance

These questions will test you on your knowledge of finance.

View More Free Quizzes
Related BrainMass Solutions

  • Financial Questions regarding Bonds, Warrants & Convertibles

    Advantages and Disadvantages of convertible bonds: Advantages: These bonds offer a way to cushion the market fluctuations while providing you with a very nice annual gain.

  • Preferred Stock Valuation - Convertible Bonds

    What is the premium in terms of stock that the investor pays when he or she purchased the convertible bond instead of stock? E. Nonconvertible bonds are selling with a yield to maturity of 7%.

  • Finance:Warrant, Contracts, Conversion, Premium, Basic EP, etc.

    For question 3, a forced conversion implies that there might come a time when a corporation may want to recall its bonds and retire them or convert them to shares. Among the various types of bonds are callable bonds and non-callable bonds.

  • Convertibles, Warrants and Derivatives

    buying bonds back at below par value. a call provision. Mirrlees Corp. has 10,000 6.25% bonds convertible into 40 shares per $1000 bond. Mirrlees has 600,000 outstanding shares. Mirrlees has a tax rate of 40%.

  • Convertible Bonds and Calculating Flotation Costs

    Black-Scholes What are the prices of a call option and a put option with the following characteristics?

  • Finance Terms - Fill in the Blanks

    A long-term rental agreement is called a(n) LEASE __. A Lease is a long-term rental agreement, j. A(n) _ CONVERTIBLE bond can be exchanged for shares of the issuing corporation.

  • Callable and Convertible Bonds

    Calculates 1) implied value of the call provision for a callable bond. 2) implied value of the conversion feature for a convertible bond.

  • Convertible Bond and Convertible Preferred Stock

    d) What is the premium in terms of stock that the investor pays when he/she purchases the convertible bond instead of stock? e) Nonconvertible bonds are selling with a yield to maturity of 7 %.

  • Conversion of Convertible Bonds

    9415 Conversion of convertible bonds Successful forced conversion of convertible bonds through a call requires that a. call price exceed par value b. conversion value exceed call price c.

View More Related Solutions