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Page 668 M/C Problems Chapter 20: Hybrid Financing
b. 11.20%
c. 11.79%
d. 12.38%
e. 13.00%
Chapter 20: Hybrid Financing M/C Problems Page 669
56. Quaid Co.'s common stock sells for $28.00, pays a dividend of $2.10,
and has an expected long-term growth rate of 6%. The firm's straight-
debt bonds yield a 10.8% return. Quaid is planning a convertible bond
issue. The bonds will have a 20-year maturity, pay a 10% annual
coupon, have a par value of $1,000, and a conversion ratio of 25 shares
per bond. The bonds will sell for $1,000 and will be callable after 10
years. Assuming that the bonds will be converted at Year 10, when they
become callable, what will be the expected return on the convertible
when it is issued?
a. 10.36%
b. 10.91%
c. 11.48%
d. 12.06%
e. 12.66%
Multiple Part:
Problems 57 through 60 must be kept together, as Problems 58-60 use data from 57.
57. The following data apply to Saunders Corporation's convertible bonds.
What is the bond's conversion ratio?
Maturity 10 Stock price $30.00
Par value $1,000 Conversion price $35.00
Annual coupon 5.00% Straight-debt yield 8.00%
a. 27.14
b. 28.57
c. 30.00
d. 31.50
e. 33.08
58. What is the bond's initial conversion value when issued?
a. $698.15
b. $734.89
c. $773.57
d. $814.29
e. $857.14
59. What is the bond's straight-debt value at the time of issue?
a. $684.78
b. $720.82
c. $758.76
d. $798.70
e. $838.63
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Chapter 20: Hybrid Financing M/C Problems Page 671
Follow-up to #57, data from #57 needed.
60. Based on your answers to the three preceding questions, what is the
minimum price (or “floor” price) at which the Saunders' bonds should
sell?
a. $698.15
b. $734.89
c. $773.57
d. $814.29
e. $857.14
CHAPTER 20
ANSWERS AND SOLUTIONS
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