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hybrid costing5

# hybrid costing5 - 750 d \$40 \$ 850 e \$40 \$1,000 Conversion...

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Multiple Choice: Problems Easy: Difference in lease and loan payments Answer: c Diff: E i . Stanley Corporation is considering a 5-year, \$6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10 percent and is amortized over five years with end-of-year payments. Stanley can also lease the equipment for an end-of-year payment of \$1,790,000. What is the difference in the actual out of pocket cash flows between the two payments? That is, by how much does one payment exceed the other? a. \$ 90,000 b. \$125,500 c. \$207,200 d. \$251,000 e. \$316,800 Conversion price Answer: c Diff: E ii . Reading Railroad’s common stock is currently priced at \$30, and its 8 percent convertible debentures (issued at par, or \$1,000) are priced at \$850. Each debenture can be converted into 25 shares of common stock at any time before 2010. What is the conversion price, P c , and the conversion value, C t , of the bond? a. \$25; \$1,000 b. \$25; \$ 750 c. \$40; \$

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Unformatted text preview: 750 d. \$40; \$ 850 e. \$40; \$1,000 Conversion price Answer: e Diff: E R iii . B&O Railroad’s convertible debentures were issued at their \$1,000 par value in 1997. At any time prior to maturity on February 1, 2017, a debenture holder can exchange a bond for 20 shares of common stock. What is the conversion price, P c ? a. \$ 25 b. \$1,000 c. \$ 40 d. \$1,025 e. \$ 50 i . Difference in lease and loan payments Answer: c Diff: E Time line: 0 k d = 10% 1 2 3 4 5 Years -6,000,000 PMT = ? PMT PMT PMT PMT Financial calculator solution: Inputs: N = 5; I = 10; PV = -6000000. Output: PMT = \$1582784.88. payments in Difference = \$1,790,000 - \$1,582,784.88 = \$207,215.16 ≈ \$207,200. ii i . Conversion price Answer: c Diff: E Conversion price = Face value/Conversion ratio = \$1,000/25 = \$40.00. Conversion value of bond = \$30 × 25 = \$750. iii i . Conversion price Answer: e Diff: E R P c = Par value/Shares received = \$1,000/20 = \$50....
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hybrid costing5 - 750 d \$40 \$ 850 e \$40 \$1,000 Conversion...

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