Tulsa Drilling Company has $1.6 million in 12 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 40, the stock price is $30, 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 of Tulsa Drilling Company common stock has risen to $40. 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 $80 to $30. (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.) Rate of return % 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.)
Tulsa Drilling Company has $1.6 million in 12 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 40, the stock price is $30, 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 of Tulsa Drilling Company common stock has risen to $40. 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 $80 to $30. (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.) Rate of return % 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.)
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
Related questions
Question
Transcribed Image Text:Tulsa Drilling Company has $1.6 million in 12 percent convertible bonds outstanding. Each bond has a $1,000 par value. The
conversion ratio is 40, the stock price is $30, 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 of Tulsa Drilling Company common stock has risen to $40. 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 $80 to $30. (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.)
Rate of return
%
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.)
Pure bond value
b-2. Would the pure bond value have a significant effect on valuation then?
Yes
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education