ans-odd-problems-ch24

ans-odd-problems-ch24 - CHAPTER 24 WARRANTS AND...

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CHAPTER 24 WARRANTS AND CONVERTIBLES Solutions to Odd-Numbered Questions and Problems NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. The conversion price is the par value divided by the conversion ratio, or: Conversion price = $1,000 / 22.4 Conversion price = $44.64 3. The conversion value is the number of shares that the bond can be converted to times the stock price. So, the conversion value for this bond is: Conversion value = $62(15) Conversion value = $930 5. a. The conversion ratio is defined as the number of shares that will be issued upon conversion. Since each bond is convertible into 24.25 shares of Hannon’s common stock, the conversion ratio of the convertible bonds is 24.25. b. The conversion price is defined as the face amount of a convertible bond that the holder must surrender in order to receive a single share. Since the conversion ratio indicates that each bond is convertible into 24.25 shares, the conversion price is: Conversion price = $1,000 / 24.25 Conversion price = $41.24 c. The conversion premium is defined as the percentage difference between the conversion price of the convertible bonds and the current stock price. So, the conversion premium is: Conversion premium = ($41.24 – 31.25) /$31.25 Conversion premium = 0.3196 or 31.96% d. The conversion value is defined as the amount that each convertible bond would be worth if it were immediately converted into common stock. So, the conversion value is: Conversion value =$31.25(24.25) Conversion value = $757.81
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, e If the stock price increases by $2, the new conversion value will be: Conversion value =$33.25(24.25) Conversion value = $806.31 7. Since a convertible bond gives its holder the right to a fixed payment plus the right to convert, it must be worth at least as much as its straight value. Therefore, if the market value of a convertible bond is less than its straight value, there is an opportunity to make an
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This note was uploaded on 02/14/2011 for the course FINANCE 620 taught by Professor Halstead during the Fall '09 term at UMBC.

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ans-odd-problems-ch24 - CHAPTER 24 WARRANTS AND...

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