Exam 20: Hybrids

Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price, which is desirable for liquidity portfolios, and they also benefit from the 70% tax exemption on preferred dividends received.

convertible debenture can never sell for more than its conversion value or less than its bond value.

problem of dilution of stockholders' earnings never results from the sale of call options, but it can arise if warrants are used.

Mariano Manufacturing can issue a 25-year, 8.1% annual payment bond at par Its investment bankers also also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%, which would represent an after-tax risk premium What coupon rate must be set on the preferred in order to issue it at par?

McGovern Enterprises is interested in issuing bonds with warrants attachedThe bonds will have a 30-year maturity and annual interest payments Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant The investment bankers estimate that each warrant will have a value of $10.00 A similar straight-debt issue would require a 10% coupon What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?