Fondren Exploration, Ltd., has 1,000 convertible bonds ($1,000 par value) outstanding, each of which may be converted to 50 shares. The $1 million worth of bonds has 25 years to maturity. The current price of the stock is $26 per share. The firm's net income in the most recent fiscal year was $270,000. The bonds pay 12 percent interest. The corporation has 150,000 shares of common stock outstanding. Current market rates on long-term nonconvertible bonds of equal quality are 14 percent. A 35 percent tax rate is assumed.
a.Compute diluted earnings per share.
b.Assume the bonds currently sell at a 5 percent conversion premium over conversion value (based on a stock price of $26). However, as the price of the stock increases from $26 to $37 due to new events, there will be an increase in the bond price, and a zero conversion premium. Under these circumstances, determine the rate of return on a convertible bond investment that is part of this price change, based on the appreciation in value.
c.Now assume the stock price is $16 per share because a competitor introduced a new product. Would the conversion value be greater than the pure bond value, based on the interest rates stated above? (See Table 16-3 in Chapter 16 to get the bond value without having to go through the actual computation.)
d.Referring to part c, if the convertible traded at a 15 percent premium over the conversion value, would the convertible be priced above the pure bond value?
e. If long-term interest rates in the market go down to 10 percent while the stock price is at $23, with a 6 percent conversion premium, what would the difference be between the market price of the convertible bond and the pure bond value? Assume 25 years to maturity, and once again use Table 16-3 for part of your answer.
Interest Rates and Bond Prices (the bond pays 12% interest)
Rate in the Market (%) - Yield to Maturity*
Years to Maturity 8% 10% 12% 14% 16%
1 1038.16 1018.54 1000 981.48 963.98
15 1345.52 1153.32 1000 875.54 774.48
25 1429.92 1182.36 1000 862.06 754.98
Please also aid in filling out the spreadsheet.© BrainMass Inc. brainmass.com October 17, 2018, 11:06 am ad1c9bdddf
Please not that Problem 19-Extra is similar to the Fondren problem, but they are not the same. However, I still used the Excel file you provided. I just changed the data. Please refer to it for the ...
The rates of return on convertible bond investments are examined. The expert computes diluted earnings per share.
Finance: Currency conversions, exchange rates, bond coupon, hedging, option
If one Swiss franc can purchase $0.85 U.S. dollars, how many Swiss francs can one U.S. dollar buy?
Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.50. If interest rate parity holds, what is the spot exchange rate ($/£)?
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Suppose DeGraw Corporation, a U.S. exporter, sold a solar heating station to a Japanese customer at a price of 139.0 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, DeGraw agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would DeGraw actually receive after it exchanged yen for U.S. dollars?
Stover Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.665 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?
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Which of the following statements is most CORRECT?
The high value of the U.S. dollar relative to Japanese and European currencies in the 1980s, made U.S. companies comparatively inexpensive to foreign buyers, spurring many mergers.
During the 1980s, the Reagan and Bush administrations tried to foster greater competition and they were adamant about preventing the loss of competition; thus, most large mergers were disallowed.
The expansion of the junk bond market made debt more freely available for large acquisitions and LBOs in the 1980s, and thus, it resulted in an increased level of merger activity.
Increased nationalization of business and a desire to scale down and focus on producing in one's home country virtually halted cross-border mergers in the 1980s.
Because strategic alliances and joint ventures are easy to form and enable firms to compete better in the global economy than would mergers, merger activity has virtually come to a halt in the 21st century.
From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's
equity cash flows.
capital budgeting project cash flows.
debt cash flows.
pension fund cash flows.
Curry Corporation is setting the terms on a new issue of bonds with warrants. The bonds will have a 30-year maturity and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant. The investment bankers estimate that each warrant will have a value of $10.50. A similar straight-debt issue would require a 10% coupon. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?
A currency trader observes the following quotes in the spot market:
1 U.S. dollar = 1.21 Japanese yen
1 British pound = 2.25 Swiss francs
1 British pound = 1.65 U.S. dollars
Given this information, how many yen can be purchased for 1 Swiss franc?
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