CORPORATE FINANCE CUSTOM W/CONNECT >BI
11th Edition
ISBN: 9781307036633
Author: Ross
Publisher: MCG/CREATE
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Textbook Question
Chapter 24, Problem 7MC
Is there anything wrong with Mark’s argument that a convertible bond is a bad idea because it allows new shareholders to participate in gains made by the company?
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Which statement is not correct?
A convertible bond is like a bond with a call option.
The amount of DPS has negative impact on favorable income differential per share of a convertible bond.
The value of a convertible bond cannot be less than its straight value.
Exchangeable bonds give the bondholder the right to exchange the bonds for the common stock of the issuer of the bond.
The conversion value of a convertible bond is directly related to its market price of common stock.
Why would the company redeem the bonds prior to the maturity date if they were going to recognize a loss? Can you think of an example of such a decision we might face in our personal lives?
Which of the following statements about convertible bonds is correct?
Before conversion, convertible bonds are treated as equity because they can be potentially converted to equity shares.
Holders are more likely to convert bonds to equity shares if stock price declines significantly.
Upon conversion, a gain or loss will be recognized.
The company who sells convertible bonds will pay interest at a lower interest rate.
Chapter 24 Solutions
CORPORATE FINANCE CUSTOM W/CONNECT >BI
Ch. 24 - Prob. 1CQCh. 24 - Prob. 2CQCh. 24 - Convertible Bonds and Stock Volatility Suppose you...Ch. 24 - Convertible Bond Value What happens to the price...Ch. 24 - Prob. 5CQCh. 24 - Warrants and Convertibles What is wrong with the...Ch. 24 - Warrants and Convertibles Why do firms issue...Ch. 24 - Convertible Bonds Why will convertible bonds not...Ch. 24 - Convertible Bonds When should a firm force...Ch. 24 - Conversion Price A convertible bond with a par...
Ch. 24 - Conversion Ratio A convertible bond with a par...Ch. 24 - Conversion Premium Eckely, Inc., recently issued...Ch. 24 - Convertible Bonds Hannon Home Products, Inc.,...Ch. 24 - Prob. 5QPCh. 24 - Convertible Bond Value An analyst has recently...Ch. 24 - Convertible Bond Value Sportime Fitness Center,...Ch. 24 - Convertible Bonds You own a callable, convertible...Ch. 24 - Prob. 9QPCh. 24 - Convertible Bonds Vital Silence Corp. bas just...Ch. 24 - Convertible Bonds Rob Stevens is the chief...Ch. 24 - Prob. 12QPCh. 24 - Prob. 13QPCh. 24 - Prob. 14QPCh. 24 - Warrant Value Superior Clamps, Inc., has a capital...Ch. 24 - Prob. 16QPCh. 24 - SS AIR'S CONVERTIBLE BOND Chris Guthrie was...Ch. 24 - What is the floor value of the SS Air convertible...Ch. 24 - What is the conversion ratio of the bond?Ch. 24 - What is the conversion premium of the bond?Ch. 24 - What is the value of the option?Ch. 24 - Is there anything wrong with Todds argument that...Ch. 24 - Is there anything wrong with Marks argument that a...Ch. 24 - Prob. 8MCCh. 24 - During the debate, a question comes up concerning...
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- An investor that owns convertible bonds in a deteriorating company would realize a higher return on his/her investment by converting the bond immediately before bankruptcy. True or False.arrow_forwardWhy does the Investors often are reluctant to convert bonds to stock, even when share prices have risen significantly since the convertible bonds were purchased?arrow_forwardWhich of the following statements is CORRECT? a. One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature. b. Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds. c. Once a firm declares bankruptcy, it must be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and legal fees. d. Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond. e. A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.arrow_forward
- What are convertible bonds? How do they protect bondholders against expropriation by stockholders.arrow_forwardWhy would a company that is a good bond investment not be a good equity investment?arrow_forwardAny of the following incidents will increase the chances of a corporation calling the unpaid callable bonds?a. A decrease in interest rates on the open market.b. The company's shares are lowered in value.c. A higher call premium.d. Both a and b are true.e. A, B, and C are right.arrow_forward
- What are the pros and cons of convertible bonds to a bond investor? Under what conditions would you favor buying convertibles over straight bonds? Why might you favor buying straight bonds over convertibles?arrow_forwardcan a convertible bond ever result in the recognition of a gain in the income statement?arrow_forwardWhich of the following is not a dominant risk that might affect the price of a bond? A Deferred interest B Board of Directors’ approval of CEO purchase of corporate jet C Step-up D Payment-in-kindarrow_forward
- Which of the following statements concerning warrants is CORRECT? JUST EXPLAIN ONE ANSWER WHICH IS INCORRECT. Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock’s price increases. However, if the option is exercised, the issuing company’s debt declines if warrants were used but remains the same if it used convertibles. Warrants are long-term call options that have value because holders can buy the firm’s common stock at the exercise price regardless of how high the stock’s price has risen. A firm’s investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.arrow_forwardFASB allows debt to be shown at its fair market value. Consequently, if a company in financial difficulty uses the fair value option, it would report a gain because investors no longer want to purchase its debt. Do you think that this is appropriate?arrow_forwardWhat economic circumstances might cause investors to take advantage of a bond's convertible feature?arrow_forward
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