Explain why warrants are issued. (Why are they used in corporate finance?)
Warrants may be used to sweeten a debt offering or as part of a merger offer or a
bankruptcy proceeding. They also offer the potential of future cash flow to th
Why is it said that convertible securities have a floor price?
The floor price of a convertible is based on the pure bond value associated with the
interest payments on the bond as shown in Figure 19-1. Regardless of how low the
The bonds of Goniff Bank & Trust have a conversion premium of $90. Their conversion
price is $20. The common stock price is $16.50. What is the price of the convertible
Goniff Bank & Trust
The conversion ratio is equal to the pa
Why are investors willing to pay a premium over the theoretical value (pure bond value or
Investors are willing to pay a premium over the theoretical value for a convertible bond
issue because of the future prospects
OReilly Moving Company has a $1,000 par value convertible bond outstanding that can
be converted into 20 shares of common stock. The common stock is currently selling for
$43.10 a share, and the convertible bond is selling for $900.00.
The bonds of Generic Labs Inc. have a conversion premium of $70. Their conversion price
is $25. The common stock price is $22.50. What is the price of the convertible bond?
Generic Labs Inc.
The conversion ratio is equal to the $1,000
What are the reasons that warrants often sell above their intrinsic value?
Warrants may sell above their intrinsic value because the investor views the associated
stocks prospects optimistically. Also, the longer the time to expiration
How can a company force conversion of a convertible bond?
A firm may force conversion of a bond issue through the use of the call privilege. If a
bond has had a substantial gain in value due to an increase in price of the underlying
The warrants of Integra Life Sciences allow the holder to buy a share of stock at $11.75
and are selling for $2.85. The stock price is currently $8.50. To what price must the stock
go for the warrant purchaser to at least be assured of breaking
Suggest two areas where the use of futures contracts is most common. What percent of the
value of the underlying security is typical as a down payment in a futures contract?
Futures contracts are most common for commodities and interes
Preston Toy Co. has warrants outstanding that allow the holder to purchase a share of
stock for $22 (exercise price). The common stock is currently selling for $28, while the
warrant is selling for $9.25 per share.
a. What is the intrinsic (min
Sherwood Forest Products has a convertible bond quoted on the NYSE bond market at 90.
(Bond quotes represent the percentage of par value. Thus, 70 represents $700, 80
represents $800, and so on.) It matures in 10 years and carries a coupon rate
What are the basic advantages to the corporation of issuing convertible securities?
The advantages to the corporation of a convertible security are:
a. The interest rate is lower than on a straight issue.
b. This type of security may b
You buy a stock option with an exercise price of $50. The cost of the option is $4. If the
stock ends up at $56, indicate whether you have a profit or loss with a call option? With a
With a call option, you would have a pro
Vernon Glass Company has $15 million in 10 percent convertible bonds outstanding. The
conversion ratio is 40, the stock price is $17, and the bond matures in 10 years. The bonds
are currently selling at a conversion premium of $45 over their co
Pittsburgh Steel Company has a convertible bond outstanding, trading in the marketplace
at $960. The par value is $1,000, the coupon rate is 10 percent, and the bond matures in 20
years. The conversion price is $55 and the companys common stock
Fondren Exploration Ltd. has 1,000 convertible bonds ($1,000 par value) outstanding,
each of which may be converted to 50 shares of stock. The $1 million worth of bonds has
25 years to maturity. The current price of the stock is $26 per share.
Plunkett Gym Equipment Inc. has a $1,000 par value convertible bond outstanding that
can be converted into 25 shares of common stock. The common stock is currently selling
for $34.75 a share, and the convertible bond is selling for $960.
Quantum Inc. has warrants outstanding that allow the holder to purchase 1.5 shares of
stock per warrant at $30 per share (exercise price). Thus, each individual share can be
purchased at $30 with the warrant. The common stock is currently selli
Standard Olive Company of California has a convertible bond outstanding with a coupon
rate of 5 percent and a maturity date of 20 years. It is rated Aa, and competitive,
nonconvertible bonds of the same risk class carry a 10 percent return. The
Online Network Inc. has a net income of $650,000 in the current fiscal year. There are
100,000 shares of common stock outstanding, along with convertible bonds, which have a
total face value of $1.6 million. The $1.6 million is represented by 1
Explain how convertible bonds and warrants are similar and different.
Convertible bonds and warrants are similar in that they give the security holder a future
option on the common stock of the corporation. They are dissimilar in that
The Olsen Mining Company has been very successful in the last five years. Its $1,000 par
value convertible bonds have a conversion ratio of 32. The bonds have a quoted interest
rate of 7 percent a year. The firms common stock is currently selli
Mr. John Hailey has $1,000 to invest in the market. He is considering the purchase of 50
shares of Comet Airlines at $20 per share. His broker suggests that he may wish to
consider purchasing warrants instead. The warrants are selling for $10,
The Gifford Investment Company bought 90 Cable Corporation warrants one year ago and
would like to exercise them today. The warrants were purchased at $25 each, and they
expire when trading ends today. (Assume there is no speculative premium le
Defense Systems Inc. has convertible bonds outstanding that are callable at $1,070.
The bonds are convertible into 33 shares of common stock. The stock is currently selling
for $39.25 per share.
a. If the firm announces it is going to call the
The Redford Investment Company bought 100 Cinema Corp. warrants one year ago and
would like to exercise them today. The warrants were purchased at $24 each, and they
expire when trading ends today (assume there is no speculative premium left).
Reynolds Technology has a convertible bond outstanding, trading in the marketplace at
$835. The par value is $1,000, the coupon rate is 9 percent, and the bond matures in 25
years. The conversion ratio is 20, and the companys common stock is se
Myers Drugs Inc. has 1.20 million shares of stock outstanding. Earnings after taxes are $9
million. Myers also has warrants outstanding that allow the holder to buy 100,000 shares
of stock at $15 per share. The stock is currently selling for $5
The price of Haltom Corporation 5 2019 convertible bonds is $1,380. For the Williams
Corporation, the 6 2018 convertible bonds are selling at $725.
a. Explain what factors might cause their prices to be different from their par value of