Exam 23: Financing With Derivatives

The Marsh Company, whose present balance sheet is summarized below, is considering the issuance of $50 million of 8% subordinated debentures that are convertible into common stock at a price of $20. Balance Sheet (millions of dollars) Current Assets \ 150 Current Liabilities \ 100 Fixed Assets, net \ 350 Long-term Debt \ 150 Total \ 500 Common Equity \ 250 Total \ 500 ? Determine the amount of long-term debt (LTD) and common equity (CE) on the pro forma balance sheet, assuming conversion of the entire issue. (Answers are in $ million.)

An option has a ____ claim.

Rizzo Company has debentures ($1,000 par) outstanding that are convertible into the company's common stock at a price of $25. The convertibles have a coupon interest rate of 8% and mature in 12 years. In addition, the convertible debenture is callable at 110% of the par value. Straight debt of equivalent risk is yielding 12%. The company's common stock is selling at $22 per share. The company has a marginal tax rate of 40%. Determine the straight-bond value of the issue.

Mercury Inc. issued bonds with warrants attached that had an exercise price of $22. Each warrant allows the holder to purchase two shares. Since the issuance, the stock split 2 for 1, the current stock price is $24 and the warrant price is $30. How much is the warrant selling above its formula value?

Craig Supermarkets, Inc. has convertible debentures ($1,000 par value) that are callable at 108% of par value. The conversion price of the debenture is $40 per share, and the Craig common stock currently is selling at $55 a share. The company ____.

The Coatesville Company has decided to sell additional common stock through a rights offering. The company has 12 million shares outstanding and plans to sell an additional 1.5 million shares through a rights offering. Each shareholder will receive one right for each share currently held, and thus each right will entitle shareholders to purchase 0.125 shares. The Coatesville common stock is currently selling at $50 per share, and the subscription price of the rights will be $45 per share. Determine the theoretical value of the rights for the ex rights case.

The conversion price of CRX's convertible ($1,000 par) subordinated debentures is $40, and the present market price of CRX common stock is $48. Determine the present conversion value of the convertible issue.

Which of the following is not a similarity between convertible securities and warrants?

A firm that issues warrants ____.

What is the value of a CKS Food's option prior to expiration if the exercise price is $20 and the current stock price is $20?

Jana owns preferred stock from High Brow Cow Dairy Farms, makers of the finest dairy products. The stock has a par value of $1,250 and a conversion ratio of 25. The stock is currently convertible. The firm's common stock is selling for $57 per share. If Jana converts the preferred stock, what would be the conversion value?

Jackson Electronics (40% marginal tax rate) is considering issuing convertible debentures. Its investment banker tentatively has agreed to issue a 9.0%, 20-year convertible debenture ($1,000 par value). The conversion price will be $50 a share. Jackson's financial managers only want to issue the convertible if its after-tax component cost of capital is less than or equal to 8.0%. Otherwise, they plan to issue non-convertible debt. Jackson's current common stock price is $43 a share. The company expects to call the convertible issue 5 years from now when the common stock price is expected to be $60 a share. Under the conditions given in this problem, what is the minimum price per debenture that Jackson can receive and keep the after-tax cost of capital for the debentures at 8.0%?

The price at which convertible securities are exchangeable for common stock is the ____.

The Bates Company has debentures ($1,000 par value) outstanding that are convertible into the company's common stock at a price of $50. The convertibles have a coupon interest rate of 9% and mature 20 years from today. Straight debt of equivalent risk is yielding 12% today. The company's common stock today is selling at $60 a share. Calculate the conversion value of the issue.

Conversion of a convertible security can occur in two ways. Which of the following is (are) correct? I. It can be a voluntary conversion at specific times prior to the expiration date. II. It can be a forced conversion at any time prior to the expiration date.

In general, the market price of a "right" is ____ than the theoretical value and this difference in values ____ as the right's expiration date approaches.