Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 24, Problem 21QP
Pricing Convertibles [LO6] You have been hired to value a new 25-year callable, convertible bond. The bond has a 3.9 percent coupon, payable annually. The conversion price is $74, and the stock currently sells for $32.10. The stock price is expected to grow at 11 percent per year. The bond is callable at $1,200, but, based on prior experience, it won’t be called unless the conversion value is $1,300. The required return on this bond is 8 percent. What value would you assign?
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Q6. Consider an asset with a current market value of $400,000 and a duration of 5 years. Assume the asset is partially funded through a zero-coupon bond with a maturity (principal) value of $360,000 and has a maturity of 5 years. The current market rate is 6% and interest rates are expected to increase by 1%. Which of the following statements is true?
The current equity value of the position is $661,976 and if interest rates increase the equity value will decrease.
The current equity value of the position is $861,876 and if interest rates increase the equity value will increase.
The current equity value of the position is $450,000 and if interest rates increase the equity value will remain unchanged.
The current equity value of the position is $130,987 and if interest rates increase the equity value will decrease.
The current equity value of the position is $40,000 and if interest rates increase the equity value will decrease.
A2 8e
with inflation rates. may i please have your reply in formula version not excel. thanks:)
You have just received an inheritance of $20,000. You wish to invest in fixed income securities such as bonds, which you think are less risky than stocks. After some research, you have narrowed down your choices to the following three fixed income securities:
One-year Treasury Bill:
Face value of $1000 Yield to maturity of 1.74%
Coupon Bond A:
Two years to maturityFace value of $1000Coupon rate of 3%, with semi-annual coupon paymentsPrice multiple of face value = 1.0189
Coupon Bond B:
Five years to maturityFace value of $1000Coupon rate of 3.5%, with annual coupon paymentsYield to maturity of 2.51%
All yields to maturity are compounded semi-annually.
Adjusting real interest rate for inflation:
(1 + real yield) = (1 + nominal yield) / (1 + inflation rate)
One Year Treasury Bill:
1 + real yield = 1.0174 / 1.015
1 + real yield = 1.002365
Real yield = 1.002365 – 1 = .2365%
Coupon…
Problem 3 Linz Styles Coupon Rate (RWJJ Ch. 20, Q5)
Linz Stylers intends to issue perpetual callable bonds with annual coupon payments. The bonds are callable at $1,250. One-year interest rates are 11 percent. There is a 60 percent probability that long-term interest rates one year from today will be 13 percent, and a 40 percent probability that long-term interest rates will be 9 percent or even lower. Assume that if interest rates fall, the fall will be sufficient for the bonds to be called. What coupon rate should the bonds have in order to sell at par value?
Chapter 24 Solutions
Fundamentals of Corporate Finance
Ch. 24.1 - What is a call option? A put option?Ch. 24.1 - If you thought that a stock was going to drop...Ch. 24.2 - What is the value of a call option at expiration?Ch. 24.2 - What are the upper and lower bounds on the value...Ch. 24.2 - Prob. 24.2CCQCh. 24.3 - Prob. 24.3ACQCh. 24.3 - Prob. 24.3BCQCh. 24.3 - Prob. 24.3CCQCh. 24.4 - Prob. 24.4ACQCh. 24.4 - Prob. 24.4BCQ
Ch. 24.5 - Why do we say that the equity in a leveraged firm...Ch. 24.5 - All other things being the same, would the...Ch. 24.6 - Prob. 24.6ACQCh. 24.6 - Prob. 24.6BCQCh. 24.6 - Prob. 24.6CCQCh. 24.7 - Prob. 24.7ACQCh. 24.7 - Prob. 24.7BCQCh. 24.7 - Prob. 24.7CCQCh. 24.7 - Prob. 24.7DCQCh. 24 - Steve sold a put option when the option premium...Ch. 24 - Prob. 24.2CTFCh. 24 - Prob. 24.4CTFCh. 24 - Prob. 1CRCTCh. 24 - Prob. 2CRCTCh. 24 - Prob. 3CRCTCh. 24 - Prob. 4CRCTCh. 24 - Prob. 5CRCTCh. 24 - Options and Stock Risk [LO2] If the risk of a...Ch. 24 - Prob. 7CRCTCh. 24 - Prob. 8CRCTCh. 24 - Prob. 9CRCTCh. 24 - Prob. 10CRCTCh. 24 - Prob. 11CRCTCh. 24 - Prob. 12CRCTCh. 24 - Prob. 13CRCTCh. 24 - Prob. 14CRCTCh. 24 - Prob. 15CRCTCh. 24 - Calculating Option Values [LO2] T-bills currently...Ch. 24 - Understanding Option Quotes [LO1] Use the option...Ch. 24 - Calculating Payoffs [LO1] Use the option quote...Ch. 24 - Calculating Option Values [LO2] The price of Build...Ch. 24 - Calculating Option Values [LO2] The price of...Ch. 24 - Using the Pricing Equation [LO2] A one-year call...Ch. 24 - Equity as an Option [LO4] Rackin Pinion...Ch. 24 - Equity as an Option [LO4] Buckeye Industries has...Ch. 24 - Calculating Conversion Value [LO6] A 1,000 par...Ch. 24 - Convertible Bonds [LO6] The following facts apply...Ch. 24 - Calculating Values for Convertibles [LO6] You have...Ch. 24 - Calculating Warrant Values [LO6] A bond with 20...Ch. 24 - Prob. 13QPCh. 24 - Prob. 14QPCh. 24 - Prob. 15QPCh. 24 - Prob. 16QPCh. 24 - Intuition and Option Value [LO2] Suppose a share...Ch. 24 - Intuition and Convertibles [LO6] Which of the...Ch. 24 - Convertible Calculations [LO6] Starset, Inc., has...Ch. 24 - Abandonment Decisions [LO5] Allied Products, Inc.,...Ch. 24 - Pricing Convertibles [LO6] You have been hired to...Ch. 24 - Abandonment Decisions [LO5] Consider the following...Ch. 24 - SS Airs Convertible Bond SS Air is preparing its...Ch. 24 - Prob. 2MCh. 24 - Prob. 3MCh. 24 - Prob. 4MCh. 24 - Prob. 5M
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- Chapter 12, Problem 3 IBM needs to raise $I billion and is trying to decide between a domestic dollar bond issue and a Eurobond issue. The U.S. bond can be issued at a coupon of 6.75 percent, paid semiannually, with underwriting and other expenses totaling 0.95 percent of the issue size. The Eurobond would cost only 0.55 percent to issue but would bear an annual coupon of 6.88 percent. Both issues would mature in 10 years. a. Assuming all else is equal, which is the least expensive issue for IBM? B. What other factors might IBM want to consider before deciding which bond to issue?arrow_forwardA4 3 You bought one of BB Co.’s 10% coupon bonds one year ago for $1100. These bonds make annual payments, have a face value of $1000 each, and mature seven years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 8%. If the inflation rate was 3% over the past year, what would be your total real return on investment according to the Exact Fisher Formula?arrow_forwardQuestion 8 A 25-year R1 000 par value bond has an 8,50% annual coupon. The bond currently sells for R875. If the yield to maturity remains at its current rate, what will the price be five years from now? 1. R 675,53 2. R 882,90 3. R 948,16 4. R10 915,78arrow_forward
- 13 . The S&P 500 is currently at 2888. The CBOE far-term VIX (^vif) is at 13.15, and the one-year LIBOR rate is 2.75%. Assuming that the far-term VIX is the right volatility for one-year options, what is the value of a derivative that pays off $1000 if the S$P 500 is above 2900 one year from today? Assume the dividend yield for the index is 1% per year.arrow_forwardD6 Assume you own a 2-year US Treasury Note with a 5% coupon and a 7-year US Treasury Note with a 0% coupon. If market interest rates decrease by 100 basis points in the 2-year maturity and declined by only 75 basis points in the 7-year maturity, which bond would experience the smallest market value change? a. 5% US Treasury due in 2 years b. 0% US Treasury due in 7 years c. Both would change by the same amount d. Prices would not change since the coupons are fixedarrow_forwardH3. 1. A convertible bond pays interest annually at a coupon rate of 5% on a par value of $1,000. The bond has 10 years maturity remaining and the discount rate on otherwise identical non-convertible debt is 6.5%. The bond is convertible into shares of common stock at a conversion price of $25 per share (i.e. the bond is exchangeable for 40 shares). Today's closing stock price was $20. What is the floor value of this bond? Please show proper step by step calculation and give fast answer within 1 hourarrow_forward
- A2 8b May I please have the answer in formula form and not excel. thx:) You have just received an inheritance of $20,000. You wish to invest in fixed income securities such as bonds, which you think are less risky than stocks. After some research, you have narrowed down your choices to the following three fixed income securities: One-year Treasury Bill: Face value of $1000 Yield to maturity of 1.74% Coupon Bond A: Two years to maturityFace value of $1000Coupon rate of 3%, with semi-annual coupon paymentsPrice multiple of face value = 1.0189 Coupon Bond B: Five years to maturityFace value of $1000Coupon rate of 3.5%, with annual coupon paymentsYield to maturity of 2.51% All yields to maturity are compounded semi-annually. b. What is the yield to maturity on Coupon Bond A?arrow_forwardP1)The interest rate is 8.3%. A company wants to sell a one-year bond for $1000 today. There is a 2% chance the company will default on its bond and only be able to repay 94% of the $1000 principal amount (and none of the coupon). What coupon rate must the company set for the bond? Give your answer in percentage to the nearest 0.1 percent. P2)*A project will have one of the following time 1 payoffs, each with the corresponding probability. $99 with probability 13%.$314 with probability 58%.$506 otherwise. The discount rate is 9.8%. The project is partially financed with debt with a time 1 promised payoff of $218. What is the promised return on the debt? Give your answer in percentage to the nearest 0.1 percent.arrow_forwardA2 8c May I please have the answer in formula form and not excel. thx:) You have just received an inheritance of $20,000. You wish to invest in fixed income securities such as bonds, which you think are less risky than stocks. After some research, you have narrowed down your choices to the following three fixed income securities: One-year Treasury Bill: Face value of $1000 Yield to maturity of 1.74% Coupon Bond A: Two years to maturityFace value of $1000Coupon rate of 3%, with semi-annual coupon paymentsPrice multiple of face value = 1.0189 Coupon Bond B: Five years to maturityFace value of $1000Coupon rate of 3.5%, with annual coupon paymentsYield to maturity of 2.51% All yields to maturity are compounded semi-annually. c. What is the price of Coupon Bond B?arrow_forward
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