Week4-Ch19 Toolkit

Week4-Ch19 Toolkit - 4/1 /2010 Chapter 19. Tool Kit for...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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 =...
View Full Document

Ask a homework question - tutors are online