Chapter 5: Q4DQ (page 622)

The price of Haltom Corporation 5¼ 2019 convertible bonds is $1,380. For the Williams Corporation, the 61/8 2018 convertible bonds are selling at $725. (LO19-3)
a. Explain what factors might cause their prices to be different from their par values of $1,000.
b. What will happen to each bond’s value if long-term interest rates decline?

Short Answer

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Answer

Halton Corporation bonds are having $1,380 par value because its common stock has increased substantially. Williams Corporation bonds are having $725 par value because its common stock decreased probably.
Halton Corporation bond value will have little or no impact. Whereas Williams Corporation bond value will go up somewhat in value.

Step by step solution

(a) The factors might cause their prices to be different from their par values

Halton bonds are above par value because its common stock has presumably hiked significantly. On the other hand in the case of Williams, it is reasonable to expect that its common stock has decreased. Also, its interest rate is likely well below the going market rate because of its low security price.

(b) Effect on each bond’s value if long-term interest rates decline

With the Halton Corporation, there would be minimal or zero impact. It is controlled by the value of its common stock. In case of Williams Corporation, its potential value is fairly connected with interest rates, so it is likely to go up somewhat in value.

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Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	\(8,500,000

Short Answer

Step by step solution

(a) The factors might cause their prices to be different from their par values

(b) Effect on each bond’s value if long-term interest rates decline

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