Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 24, Problem 9PS
Convertible bonds True or false?
- a. Convertible bonds are usually senior claims on the firm.
- b. The higher the conversion ratio, the more valuable the convertible.
- c. The higher the conversion price, the more valuable the convertible.
- d. Convertible bonds do not share fully in the price of the common stock, but they provide some protection against a decline.
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Which of the following statements about convertible bonds is correct?
Before conversion, convertible bonds are treated as equity because they can be potentially converted to equity shares.
Holders are more likely to convert bonds to equity shares if stock price declines significantly.
Upon conversion, a gain or loss will be recognized.
The company who sells convertible bonds will pay interest at a lower interest rate.
Which of the following statements is CORRECT?
a. Convertible bonds generally have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
b. A debenture is a secured bond that is backed by some or all of the firm's fixed assets.
c. Junk bonds typically provide a lower yield to maturity than investment-grade bonds.
d. A company's subordinated debt has less default risk than its senior debt.
e. Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first.
When computing diluted earnings per share (EPS), convertible bonds are:A. ignored.B. assumed converted whether they are dilutive or antidilutive.C. assumed converted only if they are antidilutive.D. assumed converted only if they are dilutive.
Chapter 24 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 24 - Bond terms Select the most appropriate term from...Ch. 24 - Sinking funds For each of the following sinking...Ch. 24 - Security and seniority a. As a senior bondholder,...Ch. 24 - Prob. 4PSCh. 24 - Prob. 5PSCh. 24 - Private placements Explain the three principal...Ch. 24 - Prob. 7PSCh. 24 - Prob. 8PSCh. 24 - Convertible bonds True or false? a. Convertible...Ch. 24 - Prob. 10PS
Ch. 24 - Bond terms Bond prices can fall either because of...Ch. 24 - Prob. 13PSCh. 24 - Prob. 14PSCh. 24 - Security and seniority a. Residential mortgages...Ch. 24 - Prob. 16PSCh. 24 - Prob. 17PSCh. 24 - Call provisions a. If interest rates rise, will...Ch. 24 - Prob. 19PSCh. 24 - Covenants Alpha Corp. is prohibited from issuing...Ch. 24 - Prob. 21PSCh. 24 - Convertible bonds The Surplus Value Company had 10...Ch. 24 - Prob. 23PSCh. 24 - Convertible bonds Iota Microsystems 10%...Ch. 24 - Prob. 25PSCh. 24 - Convertible bonds Zenco Inc. is financed by 3...Ch. 24 - Tax benefits Dorlcote Milling has outstanding a 1...Ch. 24 - Convertible bonds This question illustrates that...Ch. 24 - Prob. 29PS
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- Some market participants say that convertible bonds are “debt when you want them to be equity, and equity when you want them to be debt”. Explain why this would be the case.arrow_forwardBeacuase the conversion feature in a convertible bond is valuable to bondholders, convertible bond issues have lower coupon payments than otherwise similar bonds that are not convertible. Does this mean that a company can lower its cost of borrowingby selling convertible debt? explainarrow_forwardConvertible securities can usually be sold with interest rates ____ other nonconvertible securities a. equal to b. with no relation to c. lower than d. higher thanarrow_forward
- Convertible bonds a. Provide potential benefits only to the issuer.b. Provide potential benefits only to the investor.c. Provide potential benefits to both the issuer and the investor.d. Provide no potential benefits.arrow_forwardIf bonds payable are not callable, the issuing corporation a.can exchange them for common stock b.can repurchase them in the open market c.is more likely to repurchase them if the interest rates increase d.must get special permission from the SEC to repurchase themarrow_forwardA convertible security (usually convertible bonds or convertible preferred stock) may be tendered at the option of the holder for shares of common stock in the issuing firm. In other words, the bonds or preferred stock may be converted to common stock. Like warrants, convertibles can lead to diluted earnings, because new shares of common stock are issued. However, unlike warrants, convertibles: A. result in new capital for the firm. B. do not result in new capital for the firm. Consider the case of Cheung Zap Inc.: Cheung Zap Inc. just issued 17-year convertible bonds at a par value of $ 1,000. At any time before maturity, investors have the option to exchange their bonds for shares of Cheung's common stock at a conversion price of $60.48. Cheung's convertible bonds pay a 7.56% annual coupon, but if Cheung had issued straight - debt bonds (no conversion), it would have had to pay 12.60% annual interest. Based on the information available, complete the table: Value Conversion ratio of…arrow_forward
- Which ot the following features would decrease the value of a corporate bond? A.The bond is sinior debt obligation B.The bond is convertible into shares C.The bond is secured by a mortgage on real estate D.The borrower has the option to repay the loan before maturityarrow_forwardWhen computing diluted EPS, convertible bonds are A. ignored.B. assumed converted whether they are dilutive or antidilutive.C. assumed converted only if they are antidilutive.D. assumed converted only if they are dilutive.arrow_forwardWhy do companies find the issurance of convertible bonds to be an attractive form of financing?arrow_forward
- Which statement is FALSE regarding bonds?Select one:The pay back their face value within their maturity.They can be traded on secondary markets. Entitles its holder for cash inflows.When issued they increase the equity of the firm.arrow_forwardWhy think that convertibles are riskier than straight bonds?arrow_forwardWhich of the following events would make it more likely that a company would choose to call it’s outstanding callable bonds? An increase in market interest rates. An increase in the call premium. All the other statements are correct. The company’s bonds are downgraded. A reduction in market interest rates.arrow_forward
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