Reynolds Technology has a convertible bond outstanding, trading in the marketplace at \(835. The par value is \)1,000, the coupon rate is 9 percent, and the bond matures in 25 years. The conversion ratio is 20, and the company’s common stock is selling for $41 per share. Interest is paid semiannually.

  1. What is the conversion value?
  2. If similar bonds, which are not convertible, are currently yielding 12 percent, what is the pure bond value of this convertible bond? (Use semiannual analysis as described in Chapter 10.)

Short Answer

Expert verified
  1. The conversion value is $820
  2. The current price is$763.58

Step by step solution

01

Meaning of stock Price

The market value of the company's equity, expressed as a share, is referred to as the stock price. The financial statement of the corporation does not reflect the share's market value.

02

(a) Computing conversion value

Conversionvalue=Stockprice×Conversionrate=$41pershare×20shares=$820

03

(b) Computing pure bonds value

Currentprice=Presentvalueofbond+Presentvalueofinterest=$54.29+$709.29=$763.58

Working notes:

Compute the semi-annual interest rate on bonds, using the equation as shown below:

Semi-annualinterestrate=Interestrate2=12%2=6%

Computing the present value of the bond, using the equation as shown below:

Presentvalueofbond=Bondvalueatmaturity×1(1+Semi-annualinterestrate)50=$1,000×1(1+0.06)50=$1,000×0.05429=$54.29

Computing the present value of interest on bonds, using the equation as shown below:

Interestonbonds=Facevalueofbond×Rateofinterest×PVIFA6%,50=$1,000×4.5%×15.762=$45×15.762=$709.29

Note: The interest rate of 9% is also divided by 2, i.e., 4.5%, because of semiannual analysis.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Question: Barton Simpson, the chief financial officer of Broadband Inc. could hardly believe the change in interest rates that had taken place over the last few months. The interest rate on A2 rated bonds was now 6 percent. The $30 million, 15-year bond issue that his firm has outstanding was initially issued at 9 percent five years ago. Because interest rates had gone down so much, he was considering refunding the bond issue. The old issue had a call premium of 8 percent. The underwriting cost on the old issue had been 3 percent of par, and on the new issue it would be 5 percent of par. The tax rate would be 30 percent and a 4 percent discount rate would be applied for the refunding decision. The new bond would have a 10-year life. Before Barton used the 8 percent call provision to reacquire the old bonds, he wanted to make sure he could not buy them back cheaper in the open market.

d. In terms of the refunding decision, how should Barton be influenced if he thinks interest rates might go down even more?

Why is secondary trading in the security markets important?

What is the difference between the following yields: coupon rate, current yield, and yield to maturity? (LO16-2)

The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows:

In \( millions

In \) millions

Current assets

\(70

Current liabilities

\)30

Fixed assets

\(70

Long-term liabilities

\)30

Total liabilities

\(60

Stockholder’s equity

\)80

Total assets

\(140

Total stockholder’s equity and liabilities

\)140

The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.

f. Comment on management’s perception of market efficiency (the viewpoint of the financial officer).

What is a key tax characteristic associated with state and local (municipal) securities?

See all solutions

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free