Learning Materials
Features
Discover
Chapter 5: Q5DQ (page 622)
How can a company force conversion of a convertible bond?
Answer
The change of convertible bonds into shares of stock is generally finished at the caution of the bondholder. When a company practices a right to call a convertible bond it can force the conversion of convertible bonds into stocks.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Discuss the relationship between the coupon rate (original interest rate at time of issue) on a bond and its security provisions. (LO16-1)
Question: The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:
Bailey corporation | |
Income statement | |
For the year 20X1 | |
Sales (all on credit) | \(42,680,000 |
Cost of goods sold | \)32,240,000 |
Gross profit | \(10,440,000 |
Selling and administrative expenses | \)4,558,000 |
Operating profit | \(5,882,000 |
Interest expense | \)600,000 |
Net income before taxes | \(5,282,000 |
Taxes | \)2,120,000 |
Net income | \(3,162,000 |
Bailey corporation | |
Balance sheet | |
As of December 31, 20X1 | |
Assets | |
Current assets: | |
Cash | \)250,000 |
Marketable securities | \(130,000 |
Accounts receivables | \)6,000,000 |
Inventory | \(8,300,000 |
Total current assets | \)14,680,000 |
Net plant and equipment | \(13,970,000 |
Total assets | \)28,650,000 |
Liabilities and stockholders’ equity | |
Current liabilities: | |
Accounts payable | \(3,800,000 |
Notes payable | \)3,550,000 |
Total current liabilities | \(7,350,000 |
Long-term liabilities | \)5,620,000 |
Total liabilities | \(12,970,000 |
Stockholder’s equity: | |
Common stock (1,800,000 shares at \)1 par) | \(1,800,000 |
Capital in excess of par | \)6,300,000 |
Retained earnings | \(7,580,000 |
Total stockholder’s equity | \)15,680,000 |
Total liabilities and stockholder’s equity | $28,650,000 |
a. Assume that 800,000 new corporate shares will be issued to the general public. What will earnings per share be immediately after the public offering? (Round to two places to the right of the decimal point.) Based on the price-earnings ratio of 12, what will the initial price of the stock be? Use earnings per share after the distribution in the calculation.
The Presley Corporation is about to go public. It currently has after-tax earnings of \(7,200,000, and 2,100,000 shares are owned by the present stockholders (the Presley family). The new public issue will represent 800,000 new shares. The new shares will be priced to the public at \)25 per share, with a 5 percent spread on the offering price. There will also be $260,000 in out-of-pocket costs to the corporation.
d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public.
Trump Card Co. will issue stock at a retail (public) price of \(32. The company will receive \)29.20 per share.
a. What is the spread on the issue in the percentage terms?
b. If the firm demands receiving a new price only $2.20 below the public price suggested in part a, what will the spread be in percentage terms?
c. To hold the spread down to 2.5 percent based on the public price in part a, what net amount should Trump Card Co. receive?
Solar Energy Corp. has $4million in earnings with 4 million shares outstanding. Investment bankers think the stock can justify P/E ratio of 21. Assume the underwriting spread is 5 percent. What should the price to the public be?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Exams 
GCSE 
IGCSE 
AS 
A Level 
International A Level 
University Admissions Tests 
Flashcards 
Vaia AI 
Notes 
Study Plans 
Study Sets 
Find a job 
Find a degree 
Student Deals 
Magazine 
Mobile App