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Finance Questions

I am working on a few problems to study from. Please provide detail for the 3 attached problems.

Question 4. (15 points) Pierre Imports will be liquidated. Its current balance sheet is shown below. Fixed assets are sold for $900,000 and current assets are sold for $700,000. All fixed assets are pledged as collateral for mortgage bonds. Subordinated debentures are subordinate only to notes payable. Trustee costs are $70,000.

(20 points) Thomas Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 30 percent. The company expects to use the equipment for 5 years, with no expected salvage value. The purchase price is $1 million and MACRS depreciation, 3-year class, will apply. If the company enters into a 5-year lease, the lease payment is $230,000 per year, payable at the beginning of each year. If the company purchases the equipment it will borrow from its bank at an interest rate of 11 percent.
Question 2. (15 points) An investment company recently issued convertible bonds with a $1,000 par value. The bonds have a conversion price of $25 a share. At the time of issue, the company's underlying stock price is $20.

a. Calculate the convertible issue's conversion ratio?
b. After issuance, will the bond likely increase, decrease, or not change in value if the underlying stock price changes to $23 per share and everything else remains constant? Why?
c. The bondholder converts the bond to common stock when the price of the underlying stock reaches $35. What is the total market value of the new shares?
d. Does the company's balance sheet change at the point the bondholders convert their bonds to common stock? Explain?
e What are the advantages to the investor in buying convertible bonds instead of the stock itself?

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Solution Summary

The solution explains three questions relating to - liquidation, convertible bonds and lease vs buy