The ways in which a firm's assessment to remunerate an increased proportion of its earning as dividend affect the worth of its long-term warrants, the possibility that the convertible bonds are converted and the possibility that the warrants are exercised. Introduction: Convertibles are securities, typically bonds or preferred stocks , that can be changed over into common stock. Convertibles are frequently connected with convertible bonds, which permit investors to change over their creditor position to that of a equity holder at a agreed upon cost.

Question

a. How would a firm’s decision to pay out a higher percentage of its earnings as dividendsaffect each of the following?1. The value of its long-term warrants2. The likelihood that its convertible bonds will be converted3. The likelihood that its warrants will be exercisedb. If you owned the warrants or convertibles of a company, would you be pleased or displeasedif it raised its payout rate from 20% to 80%? Why?

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Chapter 20, Problem 10Q

a.

Summary Introduction

To Discuss: The ways in which a firm's assessment to remunerate an increased proportion of its earning as dividend affect the worth of its long-term warrants, the possibility that the convertible bonds are converted and the possibility that the warrants are exercised.

Introduction: Convertibles are securities, typically bonds or preferred stocks, that can be changed over into common stock. Convertibles are frequently connected with convertible bonds, which permit investors to change over their creditor position to that of a equity holder at a agreed upon cost.

b.

Summary Introduction

To Discuss: Whether it would be pleasing or displeasing if payout is raised from 20% to 80%.

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a. How would a firm’s decision to pay out a higher percentage of its earnings as dividendsaffect each of the following?1. The value of its long-term warrants2. The likelihood that its convertible bonds will be converted3. The likelihood that its warrants will be exercisedb. If you owned the warrants or convertibles of a company, would you be pleased or displeasedif it raised its payout rate from 20% to 80%? Why?

Which would increase a firm’s return on equity?A. Issuance of 12% bonds and investing the proceeds to earn more than 12%.B. Increasing the size of cash dividends to shareholders.C.Increase in the firm’s price earnings ratioD. Increase in market price of the firm’s ordinary share

c. Now suppose the company unexpectedlyannounced: (1) an increase in its target dividendpayout ratio from, say, 25% to 75% and (2)an increase in the dividend from $1 to $3 toconform to the new policy. Would the new dividend policy help or hurt you and other holdersof the convertible bond? Explain.