Topics: Stock, Bond, Option Pages: 12 (3165 words) Published: February 4, 2012
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What is the bond's conversion ratio? What is the bond's conversion value? What is the bond's straight-debt value? The following data apply to Saunders Corporation's convertible bonds: Maturity 10 Stock Price \$30.00 Par Value \$1,000 Conversion Price \$35.00 Annual Coupon 5% Straight-Debt Yield 8% 1) What is the bond's conversion ratio? A. 27.14 B. 28.57 C. 30.00 D. 31.50 E. 33.08 2) What is the bond's conversion value? A. \$698.15 B. \$734.89 C. \$773.57 D. \$814.29 E. \$857.14 3) What is the bond's straight-debt value? A. \$684.78 B. \$720.82 C. \$758.76 D. \$798.70 E. \$838.63 Created:

Sep 29, 2007 11:43 am
Solution By OTA:
103477, Parool Agarwal, CA (IP)

Solution go to problem
The following data apply to Saunders Corporation's convertible bonds: Maturity 10 Stock Price \$30.00 Par Value \$1,000 Conversion Price \$35.00 Annual Coupon 5% Straight-Debt Yield 8% 1) What is the bond's conversion ratio? A. 27.14 B. 28.57 C. 30.00 D. 31.50 E. 33.08 Answer: B. 28.57 Conversion ratio = Par value / Conversion Price= 28.5714 =1000/35 2) What is the bond's conversion value? A. \$698.15 B. \$734.89 C. \$773.57 D. \$814.29 E. \$857.14 Answer: E. \$857.14 Conversion Value -- The value of the convertible security in terms of the common stock into which the security can be converted.  It is equal to the conversion ratio times the current market price per share of the common stock. Conversion ratio = Number of shares that the bond can be converted into= 28.5714 Current share price= \$30.00 Therefore, conversion value of the bond= \$857.14 =28.5714x30 3) What is the bond's straight-debt value? A. \$684.78 B. \$720.82 C. \$758.76 D. \$798.70 E. \$838.63 Answer: D. \$798.70 To calculate the price of the bond we need to calculate / read from tables the values of PVIF= Present Value Interest Factor PVIFA= Present Value Interest Factor for an Annuity Price of bond= PVIF * Redemption value + PVIFA * interest payment per period PVIFA( n, r%)= =[1-1/(1+r%)^n]/r% PVIF( n, r%)= =1/(1+r%)^n Price of bond 8.00% (yield formula) Coupon rate= 5.000% =RATE(10,-50,798.69,-1000) Face value= \$1,000 Interest payment per year= \$50.00 =5.% x 1000 \$798.70 (Price) =PV(8.%,10,-50,-1000) Frequency= A Annual No of years to maturity= 10 No of Periods=n= 10 =1 x 10 Discount rate annually= 8.00% Discount rate per period=r= 8.00% =8.%/1 Annual Price of bond=PVIFA X Interest Payment per period +PVIF X Redemption value Interest payment per period= \$50.00 =50/1 Redemption value= \$1,000 =Face Value PVIF (10 periods, 8.%  rate)= 0.463193 PVIFA (10 periods, 8.%  rate)= 6.710081 PVIFA X Interest Payment= \$335.50 =6.710081*50 PVIF X Redemption value= \$463.19 =0.463193*1000 Total= \$798.69 =Price of bond Answer: Price of bond= \$798.69

Quiz 1 & 2 Fi516Grading Summary |
These are the automatically computed results of your exam. Grades for essay questions, and comments from your instructor, are in the "Details" section below. | Date Taken: | 9/25/2011 | Time Spent: | 1 h , 14 min , 19 secs |

Points Received: | 90 / 100  (90%) |
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Question Type: | # Of Questions: | # Correct: |
Short | 6 | N/A |
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1. | Question : | (TCO C) Pate & Co. has a capital budget of \$3,000,000. The company wants to maintain a target capital structure that is 15 percent debt and 85 percent equity. The company forecasts that its net income this year will be \$3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment? (a) \$205,000

(b) \$500,000
(c) \$950,000
(d) \$2,550,000
(e) \$3,050,000 |
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| Student Answer: |   | Answer: C \$950,000 Residual Dividend Model: Capital budget is \$3,000,000 % Equity is 85% Net income is \$3,500,000 Dividends paid = Net income - (% Equity * Capital budget) Dividends paid = \$3,500,000 - (85% * \$3,000,000) Dividends paid = \$950,000 |   | Instructor Explanation: | Answer is: c

Text: pp. 570-572 - Residual Dividends, Chapter 14
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