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Unformatted text preview: 4/1 /2010 Chapter 19. Tool Kit for Hybrid Financing: Prefer ed Stock, War ants, and Convertibles Problem A firm has sold 150,0 0 shares of $10 par value perpetual prefer ed stock (the total is ue is $15 mil ion). T prefer ed stock has a stated an ual dividend of $12 per share. What is the dividend yield? Par value = $10 $12 Dividend yield when is ued = 12% If yield later changes to: 9% Then price changes to: $13 .3 Alcoa's Prefer ed Stock (AA-P is ticker) Alcoa's prefer ed stock has the fol owing features: Dividend rate = 3.75% Par value = $10 Prefer ed's observed market price = $53.50 Prefer ed's market yield = 7.0% Alcoa's yield on LT debt = 8.1% As umed tax rate for corporate investor = 34% After-tax return on bond to corporate investor = 5.3% 6.3% INITIAL MARKET PRICE OF A BOND WITH WARRANTS Inputs Tax rate = 40% Price paid per bond with war ants = $1,0 0 Total funds to be raised= $50,0 0,0 0 War ants per bond = 20 Number of years until bonds mature = 20 Interest rate on straight debt = 10% Coupon rate on bond with war ants = 8% Total number of bonds= 50,0 0 Total no. of war ants = 1,0 0,0 0 Price of the 8% coupon bonds without war ants N 20 I/YR 10% FV $1,0 0 CPN PMT $80 Price = $829.73 Value of the war ants = Price paid- Value of bonds Value of the war ants = $1,0 0 - $829.73 Value of the war ants = $170.27 Value of each war ant = Total value of war ants Number of war ants = $170.27 20 Value of each war ant = $8.51 THE COMPONENT COST OF BONDS WITH WARRANTS Value of bond with war ants: $1,0 0.0 Value of straight bond portion: $829.73 Value of war ants: $170.27 % straight bond = (Value of straight bond)/(Value of bond with war ants) % straight bond = 83% % war ants = (Value of war ants)/(Value of bond with war ants) % war ants = 17% How much wil the firm be worth in 10 years? $250 Growth rate = 9% Number of years until expiration = 10 = * = $250 * 2.367 = $591.84 How much cash wil the firm receive when the war ants are exercised? Number of war ants (in mil ions) = 1 Strike price of each war ant = $2 .0 Cash received from exercise of war ants = $2 .0 What is the total value of the firm when the war ants are exercised? $591.84 Cash received from exercise of war ants = $2 .0 Total firm value after exercise of war ants = $613.84 How much wil the bonds be worth in 10 years? (There wil be 10 years remaining to maturity.) N 10 I 10% Coupon rate 8% FV $1,0 0 PMT $80 Price = $87 .1 Number of bonds (in mil ions) 0.05 Total bond value (in mil ions) = $43.85 What is the expected intrinsic value of equity in 10 years? Total firm value after exercise of war ants = $613.84 Total bond value = $43.85 Total intrinsic value of equity = $569.985 Number of shares before exercise (in mil ions) = 10 Number of shares from exercise of war ants (in mil ions) = 1 Total shares after exercise (in mil ions) = 1 Percent of equity belonging to previous war ant-holders = 9.091% Total intrinsic value of equity = $569.985 Percent of equity belonging to previous war ant-holders =...
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