2 Convertibles are generally subordinated to mortgage bonds bank loans and

2 convertibles are generally subordinated to mortgage

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2. Convertibles are generally subordinated to mortgage bonds, bank loans and other senior debt, so financing with convertibles leaves the company’s access to regular debt unimpaired. 3. Provides a way of selling common stock at prices higher than those currently prevailing. 14
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Illustration: Mountain Mining Company has an outstanding issue of convertible bonds with a P1,000 par value. These bonds are convertible into 40 shares of common stock. They have an 11% annual coupon rate and a 25 year maturity. The interest rate on a straight bond of similar risk is currently 13%.. a. Calculate the straight bond value of the bond. Bond Price = PV of Principal + PV of Interest = P1,000 x PVIF (13%, 25 years) + P1,000 x 11% x PVAIF(13%, 25 years) = P1,000 x .047 + P110 x 7.330 = P853.30 b. Calculate the conversion or stock values of the bond when the market price of the common stock is P20, P25, P28, P35 and P50 per share. Determine the selling price of the bonds. Source: Principles of Managerial Finance 8/e Gitman/AddisonWesley Longman Foundations of Financial Management 11/e Block and Hirt / McGraw Hill Essentials of Managerial Finance 10/e Weston & Brigham/ Harcourt Brace and Company Barron’s Business Review Books - Finance 4/e by Groppelli & Nikbakht 15
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i Bond Table Values Calculator Solution A B o  P140  (7.469)  P1,000  (0.104)  P1,149.66 P1,149.39 B B o  P80  (8.851)  P1,000  (0.292)  P1,000.00 P1,000.00 C B o  P10  (4.799)  P100  (0.376)  P85.59 P85.60 D B o  P80  (4.910)  P500  (0.116)  P450.80 P450.90 E B o  P120  (6.145)  P1,000  (0.386)  P1,123.40 P1,122.89 ii -15. LG 4: Common Stock Value–All Growth ModelsChallenge(a) P0 = (CF0 ÷ k)P0 = P42,500 ÷ 0.18P0 = P236,111(b) P0 = (CF1 ÷ (k − g))P0 = (P45,475* ÷ (0.18 − 0.07)P0 = P413,409.10*CF1 = P42,500(1.07) = P45,475Chapter 7 Stock Valuation 181(c) Steps 1 and 2: Value of cash dividends and present value of annual dividendsTD0FVIF12%,tDtPVIF18%,tPresent Valueof Dividends1 P42,500 1.120 P47,600 0.847 P40,317.202 P42,500 1.254 53,295 0.718 38,265.81P78,583.01Step 3: Present value of price of stock at end of initial growth periodD2+1 = P53,295 × (1 + 0.07)D3 = P57,025.65P2 = [D3 ÷ (ks − g)]P2 = P57,025.65 ÷ (0.18 − 0.07)P2 = P518,415PV of stock at end of year 2 = P2 × (PVIF18%,2)PV = P518,415 × (0.718)PV = P372,222Step 4: Sum of present value of dividends during initial growth period and present valueprice of stock at end of growth periodP0 = P78,583 + P372,222P0 = P450,805
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