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Exam 20: Hybrid Financing: Preferred Stock, Warrants, and Convertibles

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Question 21

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Exhibit 20.1 The following data apply to Neuman Corporation's convertible bonds: $\begin{array}{c}\begin{array}{lll}\text {Maturity:}\\\text {Par value:}\\\text {Annual coupon:}\end{array}\begin{array}{lll}\text{ 10 Stock price:}\\\text {\$ 1,000.00 Conversion price:}\\\text {5.00 \% Straight-debt yield:}\end{array}\begin{array}{l}\$ 30.00 \\\$ 35.00 \\8.00 \% \end{array}\end{array}$ -Refer to Exhibit 20.1.What is the minimum price (or "floor" price) at which the Neuman's bonds should sell?

A) $698.15
B) $734.89
C) $773.57
D) $814.29
E) $857.14

F) B) and D)
G) B) and C)

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Question 22

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A convertible debenture can never sell for more than its conversion value or less than its bond value.

A) True
B) False

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Question 23

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Firms generally do not call their convertibles unless the conversion value is greater than the call price.

Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.

A detachable warrant is a warrant that can be detached and traded separately from the bond with which it was issued.Most traded warrants are originally attached to bonds or preferred stocks.

Which of the following statements concerning warrants is correct?

Potter & Lopez Inc.just sold a bond with 50 warrants attached.The bonds have a 20-year maturity and an annual coupon of 12%,and they were issued at their $1,000 par value.The current yield on similar straight bonds is 15%.What is the implied value of each warrant?

McGovern Enterprises is interested in issuing bonds with warrants attached.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 $10.00.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?

Mariano Manufacturing can issue a 25-year,8.1% annual payment bond at par.Its investment bankers also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket.The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%,which would represent an after-tax risk premium.What coupon rate must be set on the preferred in order to issue it at par?

Exhibit 20.1 The following data apply to Neuman Corporation's convertible bonds: $\begin{array}{c}\begin{array}{lll}\text {Maturity:}\\\text {Par value:}\\\text {Annual coupon:}\end{array}\begin{array}{lll}\text{ 10 Stock price:}\\\text {\$ 1,000.00 Conversion price:}\\\text {5.00 \% Straight-debt yield:}\end{array}\begin{array}{l}\$ 30.00 \\\$ 35.00 \\8.00 \% \end{array}\end{array}$ -Refer to Exhibit 20.1.What is the bond's conversion value?