Home Spreadsheet Templates Foundations of Financial Management MAIN MENU - CHAPTER 19 Convertibles, Warrants, and Derivatives Problem 19-12 Problem 19-19 Problem 19-21 Spreadsheet Templates by Block, Hirt and Danielsen Copyright © 2009 McGraw-Hill/Irwin and ANSR Source India Pvt. Ltd. (www.ansrsource.com) Problem 19-12 Foundations of Financial Management Block, Hirt and Danielsen - Thirteenth Edition Problem 19-12 Objective Conversion value versus pure bond value Student Name: Course Name: Student ID: Course Number: Eastern Digital Corp. has a convertible bond outstanding with a coupon rate of 9 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 conversion ratio is 40. Currently the common stock is selling for $18.25 per share on the New York Stock Exchange. a. What is the conversion price? b. What is the conversion value? c. Compute the pure bond value. (Use semiannual analysis.) d. Draw a graph that includes the floor price and the conversion value but not the convertible bond price. For the stock price on the horizontal axis, use 10, 20, 30, 40, and 50. e. Which will influence the bond price more—the pure bond value (floor value) or the conversion premium? Solution Problem 19-12 Instructions Enter formulas to complete the requirements of this problem. Assumptions Par value $1,000 Conversion ratio 40 Stock price $18.25 Years till maturity 20 Nonconvertible bond return 10% Convertible bond coupon rate 9% a. What is the conversion price? FORMULA b. What is the conversion value? FORMULA c. Compute the pure bond value. (Use semiannual analysis - use the MS Excel PV function.) Pure bond value FORMULA d. Draw a graph that includes the pure bond value and the conversion value but not the convertible bond price. For the stock price on the horizontal axis, use 10, 20, 30, 40, and 50. Stock Pure Bond Conversion Prices Value Value $10 FORMULA $20 FORMULA $30 FORMULA $40 FORMULA $50 FORMULA e. Which will influence the bond price more—the pure bond value or the conversion value? &8Copyright © 2009 McGrawHill/ Irwin &8Spreadsheet Template by Block, Hirt and Danielsen &8Problem: 19-12 Problem 19-19 Foundations of Financial Management Block, Hirt and Danielsen - Thirteenth Edition Problem 19-19 Objective Earnings per share with convertibles Student Name: Course Name: Student ID: Course Number: Hughes Technology has had net income of $450,000 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 $1.2 million. The $1.2 million is represented by 1,200 different $1,000 bonds. Each $1,000 bond pays 6 percent interest. The conversion ratio is 20. The firm is in a 30 percent tax bracket. a. Calculate Hughes’s basic earnings per share. b. Calculate Hughes’s diluted earnings per share. Solution Problem 19-19 Instructions Enter formulas to complete the requirements of this problem. Assumptions Net income $450,000 Common stock shares 100,000 Convertible bonds $1,200,000 Number of bonds 1,200 Face value per bond $1,000 Interest 6% Conversion ratio 20 Tax rate 30% a. Calculate basic earnings per share. FORMULA b. Calculate diluted earnings per share. FORMULA &8Copyright © 2009 McGrawHill/ Irwin &8Spreadsheet Template by Block, Hirt and Danielsen &8Problem: 19-19 Problem 19-21 Foundations of Financial Management Block, Hirt and Danielsen - Thirteenth Edition Problem 19-21 Objective Conversion value and changing pure bond value Student Name: Course Name: Student ID: Course Number: Tulsa Drilling Company has $1 million in 11 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 40, the stock price is $32, and the bonds mature in 10 years. The bonds are currently selling at a conversion premium of $70 over the conversion value. a. If the price of Tulsa Drilling Company common stock rises to $42 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 that on this date next year, the conversion premium has shrunk from $70 to $20. b. Assume the yield on similar nonconvertible bonds has fallen to 8 percent at the time of sale. What would the pure bond value be at that point? (Use semiannual analysis.) Would the pure bond value have a significant effect on valuation then? Solution Problem 19-21 Instructions Enter formulas to complete the requirements of this problem. Assumptions Conversion ratio 40 Stock price $32 Years till maturity 10 Conversion premium $70 Coupon rate 11% a. If the price of Tulsa Drilling Company common stock rises to $42 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 that on this date next year, the conversion premium has shrunk from $70 to $20. Current market price of convertible bond FORMULA Price of convertible next year FORMULA Annual return FORMULA b. Assume the yield on similar nonconvertible bonds has fallen to 8 percent at the time of sale. What would the pure bond value be at that point? (Use semiannual analysis.) Yield at time of sale 8% Years remaining 9 Pure bond value FORMULA Would the pure bond value have a significant effect on valuation then? &8Copyright © 2009 McGrawHill/ Irwin &8Spreadsheet Template by Block, Hirt and Danielsen &8Problem:19-21