Question

Tulsa Drilling Company has $1.3 million in 13 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 40, the stock price is $25, and the bonds mature in 10 years. The bonds are currently selling at a conversion premium of $70 over the conversion value. Use Appendix B and Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods. a. Today, one year later, the price of Tulsa Drilling Company common stock has risen to $35. What would your rate of return be if you had purchased the convertible bond one year ago and sold it today? Assume that on the date of sale, the conversion premium has shrunk from $70 to $20. (Hint: Don’t forget to include the interest payment for the first year) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) b-1. Assume the yield on similar nonconvertible bonds has fallen to 10 percent at the time of sale. What would the pure bond value be at that point? (Use semiannual analysis.) (Do not round intermediate calculations. Round your final answer to 2 decimal places.) b-2. Would the pure bond value have a significant effect on valuation then? Yes No

Answer #1

Tulsa Drilling Company has $1.5 million in 14 percent
convertible bonds outstanding. Each bond has a $1,000 par value.
The conversion ratio is 50, the stock price is $31, and the bonds
mature in 10 years. The bonds are currently selling at a conversion
premium of $80 over the conversion value. Use Appendix B and
Appendix D as an approximate answer, but calculate your final
answer using the formula and financial calculator methods.
a. Today, one year later, the price...

Vernon Glass Company has $20 million in 10 percent convertible
bonds outstanding. The conversion ratio is 60, the stock price is
$16, and the bond matures in 20 years. The bonds are currently
selling at a conversion premium of $40 over their conversion
value.
If the price of the common stock rises to $22 on this date next
year, what would your rate of return be if you bought a convertible
bond today and sold it in one year? Assume...

Vernon Glass Company has $20 million in 10 percent, $1,000 par
value convertible bonds outstanding. The conversion ratio is 40,
the stock price is $22, and the bond matures in 15 years. The bonds
are currently selling at a conversion premium of $55 over their
conversion value.
If the price of the common stock rises to $28 on this date next
year, what would your rate of return be if you bought a convertible
bond today and sold it in...

Standard Olive Company of California has a $1,000 par value
convertible bond outstanding with a coupon rate of 6 percent and a
maturity date of 5 years. It is rated Aa, and competitive,
nonconvertible bonds of the same risk class carry a 10 percent
yield. The conversion ratio is 25. Currently the common stock is
selling for $20 per share on the New York Stock Exchange. a. What
is the conversion price? (Round your answer to 2 decimal places.)
b....

You have been hired to value a new 20-year callable, convertible
bond. The bond has a coupon rate of 2.8 percent, payable
semiannually, and its face value is $1,000. The conversion price is
$59, and the stock currently sells for $46. a. What is the minimum
value of the bond? Comparable nonconvertible bonds are priced to
yield 3 percent. (Do not round intermediate calculations and round
your answer to 2 decimal places, e.g., 32.16.) b. What is the
conversion premium...

You have been hired to value a new 20-year callable, convertible
bond. The bond has a coupon rate of 8.4 percent, payable
semiannually, and its face value is $1,000. The conversion price is
$67, and the stock currently sells for $54.
a.
What is the minimum value of the bond? Comparable nonconvertible
bonds are priced to yield 9 percent. (Do not round
intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.)
b.
What is the
conversion premium...

Problem 18-6 Convertible Bonds (LO3, CFA5) A convertible bond
has a coupon of 6 percent, paid semiannually, and will mature in 18
years. If the bond were not convertible, it would be priced to
yield 5 percent. The conversion ratio on the bond is 30 and the
stock is currently selling for $39 per share. What is the minimum
value of this bond? (Do not round intermediate calculations. Round
your answer to 2 decimal places.)

O'Reilly Moving Company 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 $40.10 a share, and the
convertible bond is selling for $1,050.
a. What is the conversion value of the bond?
(Do not round intermediate calculations
and round your answer to 2 decimal places.)
Conversion Value
b. What is the conversion premium? (Do
not round intermediate calculations and round your
answer to 2...

You have been hired to value a new 30-year callable, convertible
bond. The bond has a coupon rate of 2.7 percent, payable
semiannually, and its face value is $1,000. The conversion price is
$54, and the stock currently sells for $38.
a. What is the minimum value of the bond? Comparable
nonconvertible bonds are priced to yield 4.9 percent. (Do not round
intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.)

Exodus Limousine Company has $1,000 par value bonds outstanding
at 17 percent interest. The bonds will mature in 50 years. Use
Appendix B and Appendix D for an approximate answer but calculate
your final answer using the formula and financial calculator
methods.
Compute the current price of the bonds if the percent yield to
maturity is: (Do not round intermediate calculations. Round
your final answers to 2 decimal places. Assume interest payments
are annual.)
Exodus Limousine Company has $1,000...

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