Chapter 6 Case (static) Question Help bonds were issued 5 years ago at their $1,000 par value and have exactly 25 years remaining until they mature. They have an 8.0% coupon interest rate, are convertible into 50 shares of common stock, and can be called any time at $1,080.00. The bond is rated Aa by Moody's. Atilier Industries, a manufacturer of sporting goods, recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moody's and other rating agencies are considering a rating change for Atilier bonds. Recent economic data suggest that expected inflation, currently at 5.0% annually, is likely to increase to a 6.0% annual rate. Annie remains interested in the Atilier bond but is concerned about inflation, a potential rating change, and maturity risk. To get a feel for the potential impact of these factors on the bond value, she decided to apply the valuation techniques she learned in her finance course. To Do a. If the price of the common stock into which the bond is convertible rises to $30.00 per share after 5 years and the issuer calls the bonds at $1,080.00, should Annie let the bond be called away from her or should she convert it into common stock? b. For each of the following required returns, calculate the bond's value, assuming annual interest. Indicate whether the bond will sell at a discount, at a premium, or at par value. (1) Required return is 6.0%. (2) Required return is 8.0%. (3) Required return is 10.0%. a. If the price of the common stock into which the bond is convertible rises to $30.00 per share after 5 years and the issuer calls the bonds at $1,080.00, should Annie le the bond be called away from her or should she convert it into common stock? The value of the stock if the bond is converted is $. (Round to the nearest cent.)
Chapter 6 Case (static) Question Help bonds were issued 5 years ago at their $1,000 par value and have exactly 25 years remaining until they mature. They have an 8.0% coupon interest rate, are convertible into 50 shares of common stock, and can be called any time at $1,080.00. The bond is rated Aa by Moody's. Atilier Industries, a manufacturer of sporting goods, recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moody's and other rating agencies are considering a rating change for Atilier bonds. Recent economic data suggest that expected inflation, currently at 5.0% annually, is likely to increase to a 6.0% annual rate. Annie remains interested in the Atilier bond but is concerned about inflation, a potential rating change, and maturity risk. To get a feel for the potential impact of these factors on the bond value, she decided to apply the valuation techniques she learned in her finance course. To Do a. If the price of the common stock into which the bond is convertible rises to $30.00 per share after 5 years and the issuer calls the bonds at $1,080.00, should Annie let the bond be called away from her or should she convert it into common stock? b. For each of the following required returns, calculate the bond's value, assuming annual interest. Indicate whether the bond will sell at a discount, at a premium, or at par value. (1) Required return is 6.0%. (2) Required return is 8.0%. (3) Required return is 10.0%. a. If the price of the common stock into which the bond is convertible rises to $30.00 per share after 5 years and the issuer calls the bonds at $1,080.00, should Annie le the bond be called away from her or should she convert it into common stock? The value of the stock if the bond is converted is $. (Round to the nearest cent.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:Chapter 6 Case (static)
Question Help
bonds were issued 5 years ago at their $1,000 par value and have exactly 25 years remaining until they mature. They have an 8.0% coupon interest rate, are
convertible into 50 shares of common stock, and can be called any time at $1,080.00. The bond is rated Aa by Moody's. Atilier Industries, a manufacturer of sporting
goods, recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moody's and other rating agencies are considering
a rating change for Atilier bonds. Recent economic data suggest that expected inflation, currently at 5.0% annually, is likely to increase to a 6.0% annual rate.
Annie remains interested in the Atilier bond but is concerned about inflation, a potential rating change, and maturity risk. To get a feel for the potential impact of these
factors on the bond value, she decided to apply the valuation techniques she learned in her finance course.
To Do
a. If the price of the common stock into which the bond is convertible rises to $30.00 per share after 5 years and the issuer calls the bonds at $1,080.00, should Annie
let the bond be called away from her or should she convert it into common stock?
b. For each of the following required returns, calculate the bond's value, assuming annual interest. Indicate whether the bond will sell at a discount, at a premium, or
at par value.
(1) Required return is 6.0%.
(2) Required return is 8.0%.
(3) Required return is 10.0%.
a. If the price of the common stock into which the bond is convertible rises to $30.00 per share after 5 years and the issuer calls the bonds at $1,080.00, should Annie le
the bond be called away from her or should she convert it into common stock?
The value of the stock if the bond is converted is $. (Round to the nearest cent.)
Expert Solution
Step 1
Bonds are generally the instruments of debt which can yield a fixed interest amount.
Step 2
a)
After 5 years, when the price rises to $30 per share, the price that will be obtained by converting bond into 50 shares is 1500(50*30=1500). This amount is more than $1080, which is the call price. Therefore the bond is to be converted into 50 shares.
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