Purchase Solution

Convertible Debt

Not what you're looking for?

Ask Custom Question

Massey Coal just issued $50 million of convertible notes. Each note has a $1,000 face value, a stated interest rate of 2%, and matures in five years from the issue date. Investors have the option of holding each note to maturity or converting the note into 100 shares of Massey Coal common stock. Conversion is not permitted during the first two years after the issue date. The company received $50 million cash from investors when the convertible notes were issued.
1. Why were investors willing to pay $50 million for Masse's debt when the promised interest rate is only 2%?
2. Several analysts claim that Massey's incremental borrowing rate for a similar five-year note without the conversion option is 12%. Describe how analysts might have arrived at this borrowing rate from information typically found in a company's financial statements and notes.

Purchase this Solution

Solution Summary

This posting gives you an in-depth insight into Convertible Debt

Solution Preview

Step 1:
The investors are willing to pay $50 million for Masse's debt when the promised interest rate is only 2% because the convertible note gives the option of converting into 100 shares of Massey Energy Co. common stock two years after the date of issue because the current market price of Massey Coal stocks is high.

The current price of common stock of Massey Energy Co. at the NYSE is $65.14. If we consider 100 shares of common stock, it means a value of $6514. Currently the ...

Purchase this Solution

Free BrainMass Quizzes

This tests some key elements of major motivation theories.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking