1. Breur investment’s convertible bonds have a $1000 par value and a conversion price of $50 a share. What is the convertible issues conversion ratio?
2. Maese industries Inc. has warrants outstanding that permit the holder to purchase 1 share of stock per warrant at a price of $25.
a. Calculate the exercise value of the firms warrants if the common sells at each of the followin prices: (1) $20, (2) $25, (3) $30, (4) $100
b. Assume the firm’s stock now sells for $20 per share. The company wants to sell some 20 year, $1000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $25. the firms straight bonds yield 12%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate, and dollar coupon, must the company set on the bonds with warrants if they are to clear the market?
3. The howland carpet company has grown rapidly during the past 5 years. recently itls commercial bank urge the company to consider increasing its permanent fiancing. its bank loan under a line of credit has risen to $250,000, carrying an 8% interest rate. Howland has been 30 to 60 days late in paying trade creditors.
Discussions with an investment bankers have assured the firm that the following alternatives are feasible (floating cost will be ignored)
· Alternative 1: sell common stock at $8
· Alternative 2: sell convertible bonds at an 8% coupon convertible into 100 shares of common stock for $1000 bond (i.e. the conversion price is $10 per share)
· Alternative 3: sell debentures at an 8% coupon each $1000 bond carrying 100 warrants to buy common stock at $10
John L. Howland, the president owns 80% of the common stock and wishes to maintain contol of the company. There are 100,000 shares outstanding. The following are extracts of howland latest financial statements: