Calculate the company's current debt ratio.
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1- Pierre Imports recently issued two types of bonds. The first issue consisted of 10-year straight debt with a 10 percent annual coupon. The second issue consisted of 10-year bonds with a 9 percent annual coupon and attached warrants. Both issues sold at their $1,000 par values. The company's stock is currently selling for $24.50 per share.
a. Calculate the implied value of the warrants attached to each bond.
b. Discuss the advantages to the investor of purchasing bonds with warrants instead of straight bonds?
c. Discuss 2-3 advantages to the company of issuing a bond with warrants instead of straight bonds?
d. What will happen to the value of the bond with warrants if the company's stock price increases? Why?
e. What will likely happen to the value of the straight bond if the company's stock price increases? Why?
2.- Epoty Corporation is evaluating whether to lease or purchase needed equipment at a cost of $10,000. If the equipment is leased, the lease would not have to be capitalized. The company's balance sheet prior to the acquisition of the equipment is as follows.
a. Calculate the company's current debt ratio?
Equipment cost $10,000
Current Balance Sheet
Current assets $50,000 Debt $35,000
Net Fixed assets 40,000 Equity 55,000
Total assets $90,000 Total claims $90,000
b. Calculate the company's debt ratio if it purchases the equipment.
c. Calculate the company's debt ratio if it leases the equipment?
d. Will the company's ROA and ROE ratios be affected by its decision to lease or purchase? Why or why not?
e. What factors should the company consider in coming to its decision other than net advantage to leasing? Why?
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Education
- MBA, Indian Institute of Finance
- Bsc, Madras University
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