Dark Creek Corporation's CEO is selecting between two mutually exclusive projects. The company is obligated to make a $3,700 payment to bondholders at the end of the year. To minimize agency cost, the firm's bondholders decide to use a bond covenant to stipulate that the bondholders can demand an additional payment if the company chooses to take on the high-volatility project. How much additional payment to bondholders would make stockholders indifferent between the two projects? Cash flows pertaining to the two projects are shown in the table below. Economy Probability 40 Low-Volatility Project Payoff High-Volatility Project Payoff $2,900 Bad $4,000 Good .60 4,800 6,300 O $1366.67 O $1166,67 O $1300.00 O $1233.33

Dark Creek Corporation's CEO is selecting between two mutually exclusive projects. The company is obligated to make a $3,700 payment to bondholders at the end of the year. To minimize agency cost, the firm's bondholders decide to use a bond covenant to stipulate that the bondholders can demand an additional payment if the company chooses to take on the high-volatility project. How much additional payment to bondholders would make stockholders indifferent between the two projects? Cash flows pertaining to the two projects are shown in the table below. Economy Probability 40 Low-Volatility Project Payoff High-Volatility Project Payoff $2,900 Bad $4,000 Good .60 4,800 6,300 O $1366.67 O $1166,67 O $1300.00 O $1233.33

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You are an accountant for Taos Company, which has two items of long-term convertible debt on its balance sheet. Taos's president calls you into his office and says, "We are too leveraged. So, you remember that convertible debt we issued at the beginning of the year? Let's figure out the value of the conversion feature and assign that to equity so that we can reduce the amount we report as debt. And I have also been thinking about that convertible debt we issued at par 5 years ago. If you remember, each $1,000 bond is convertible into 25 shares. Now that our shares are trading at $70, obviously that is no longer debt. So let's classify that debt as equity now." Required: From financial reporting and ethical perspectives, discuss the issues raised by this situation.
Slush Corporation has two bonds outstanding, each with a face value of $3.4 million. Bond A is secured on the company's head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its head office building is worth $1.14 million, but its remaining assets are now worth only $2 million. If the company defaults, what payoff can the holders of bond B expect? Note: Enter your answer in dollars, not in millions. Round your answer to the nearest whole dollar amount. Payoff of bond B
Assume that you were recently hired as assistant to Jerry Lehman, financial VP of Coleman Technologies. Your first task is to estimate Coleman’s cost of capital. Lehman has provided you with the following data, which he believes is relevant to your task: The firm’s marginal tax rate is 40%. The current price of Coleman’s 12 % coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Coleman does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $113.10. Coleman would incur flotation costs of $2 per share on a new issue. Coleman’s common stock is currently selling at $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Coleman’s beta is 1.2, the yield on Treasury bonds is 7%, and the market risk…
You need to choose between making a public offering and arranging a private placement. In each case, the issue involves $10 million face value of 10-year debt. You have the following data for each: • A public issue. The interest rate on the debt would be 8.5%, and the debt would be issued at face value. The underwriting spread would be 1.5%, and other expenses would be $80,000. A private placement. The interest rate on the private placement would be 9% , but the total issuing expenses would be only $30,000 a-1. Calculate the net proceeds from public issue. Note: Enter your answer in dollars not millions of dollars. a-2. Calculate the net proceeds from private placement. Note: Enter your answer in dollars not millions of dollars. b-1. Calculate the Present Value of the extra interest on the private placement. Note: Do not round intermediate calculations. Enter your answer in dollars not millions of dollars. Round your answer to the nearest whole dollar amount. b-2. Other things being…
Slush Corporation has two bonds outstanding, each with a face value of $3.6 million. Bond A is secured on the company's head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its head office building is worth $1.16 million, but its remaining assets are now worth only $2 million. If the company defaults, what payoff can the holders of bond B expect? Note: Enter your answer in dollars, not in millions. Round your answer to the nearest whole dollar amount. Payoff of bond B
The Optical World Corporation, a manufacturerof peripheral vision storage systems, needs $10 million to market its new robotics-based vision systems.The firm is considering two financing options: common stock and bonds. If the firm decides to raise thecapital through issuing common stock, the flotationcosts will be 6%, and the share price will be $25. Ifthe firm decides to use debt financing, it can sell a10-year, 12% bond with a par value of $1,000. Thebond flotation costs will be 1.9%.(a) For equity financing, determine the flotationcosts and the number of shares to be sold to net$10 million.(b) For debt financing, determine the flotation costsand the number of $1,000 par value bonds tobe sold to net $10 million. What is the requiredannual interest payment?
Mark Sexton and Todd Story, the owners of S&S Air, have decided to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $20 million in new 10-year bonds to finance construction. Chris has entered into discussions with Renata Harper, an underwriter from the firm of Crowe & Mallard, about which bond features S&S Air should consider and what coupon rate the issue will likely have. Although Chris is aware of the bond features, he is uncertain as to the costs and benefits of some features, so he isn’t clear on how each feature would affect the coupon rate of the bond issue. You are Renata’s assistant, and she has asked you to prepare a memo to Chris describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or disadvantages of each feature. QUESTIONS 1. The security of the bond—that is, whether the bond…
Slush Corporation has two bonds outstanding, each with a face value of $2.3 million. Bond A is secured on the company's head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its head office building is worth $1.03 million, but its remaining assets are now worth only $2 million. If the company defaults, what payoff can the holders of bond B expect? Note: Enter your answer in dollars, not in millions. Round your answer to the nearest whole dollar amount. Payoff of bond B
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