Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 24, Problem 9PS
Convertible bonds True or false?
- a. Convertible bonds are usually senior claims on the firm.
- b. The higher the conversion ratio, the more valuable the convertible.
- c. The higher the conversion price, the more valuable the convertible.
- d. Convertible bonds do not share fully in the price of the common stock, but they provide some protection against a decline.
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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.
Which of the following statements is CORRECT?
a. Convertible bonds generally have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
b. A debenture is a secured bond that is backed by some or all of the firm's fixed assets.
c. Junk bonds typically provide a lower yield to maturity than investment-grade bonds.
d. A company's subordinated debt has less default risk than its senior debt.
e. Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first.
When dilutive convertible bonds are the only potential ordinary shares, the diluted EPS will be __________if the bonds are actually converted compared to when they are not converted.
A. lower
B. higher
C. the same
D. incomparable
Chapter 24 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 24 - Bond terms Select the most appropriate term from...Ch. 24 - Sinking funds For each of the following sinking...Ch. 24 - Security and seniority a. As a senior bondholder,...Ch. 24 - Prob. 4PSCh. 24 - Prob. 5PSCh. 24 - Private placements Explain the three principal...Ch. 24 - Prob. 7PSCh. 24 - Prob. 8PSCh. 24 - Convertible bonds True or false? a. Convertible...Ch. 24 - Prob. 10PS
Ch. 24 - Bond terms Bond prices can fall either because of...Ch. 24 - Prob. 13PSCh. 24 - Prob. 14PSCh. 24 - Security and seniority a. Residential mortgages...Ch. 24 - Prob. 16PSCh. 24 - Prob. 17PSCh. 24 - Call provisions a. If interest rates rise, will...Ch. 24 - Prob. 19PSCh. 24 - Covenants Alpha Corp. is prohibited from issuing...Ch. 24 - Prob. 21PSCh. 24 - Convertible bonds The Surplus Value Company had 10...Ch. 24 - Prob. 23PSCh. 24 - Convertible bonds Iota Microsystems 10%...Ch. 24 - Prob. 25PSCh. 24 - Convertible bonds Zenco Inc. is financed by 3...Ch. 24 - Tax benefits Dorlcote Milling has outstanding a 1...Ch. 24 - Convertible bonds This question illustrates that...Ch. 24 - Prob. 29PS
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- Beacuase the conversion feature in a convertible bond is valuable to bondholders, convertible bond issues have lower coupon payments than otherwise similar bonds that are not convertible. Does this mean that a company can lower its cost of borrowingby selling convertible debt? explainarrow_forwardWhen dilutive convertible bonds are the only potential ordinary shares, the diluted EPS will be __________if the bonds are actually converted compared to when they are not converted. * lower higher the same incomparablearrow_forwardWhen dilutive convertible bonds are the only potential ordinary shares, the diluted earnings per share (EPS) will be __________if the bonds are actually converted compared to when they are not converted.A. lowerB. higherC. the sameD. incomparablearrow_forward
- Convertible securities can usually be sold with interest rates ____ other nonconvertible securities a. equal to b. with no relation to c. lower than d. higher thanarrow_forwardWhich 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_forwardSome market participants say that convertible bonds are “debt when you want them to be equity, and equity when you want them to be debt”. Explain why this would be the case.arrow_forward
- What is a convertible bond? If a company decidesto raise capital by issuing convertible bonds, howwould the terms on the bond be set? Considerspecifically the maturity, coupon rate, and callfeatures of the bond, as well as the conversionprice (or conversion ratio), together with any otherparameters required for the analysis.arrow_forwardWhich of the following events would make it more likely that a company would choose to call it’s outstanding callable bonds? An increase in market interest rates. An increase in the call premium. All the other statements are correct. The company’s bonds are downgraded. A reduction in market interest rates.arrow_forwardWhen bondholders decide to exercise their convertible bonds, the company values the common stock at the ________. Assume there is no beneficial conversion option at bond issue. Group of answer choices market value of the stock par value of the stock carrying value of the bonds par value of the bondsarrow_forward
- Which ot the following features would decrease the value of a corporate bond? A.The bond is sinior debt obligation B.The bond is convertible into shares C.The bond is secured by a mortgage on real estate D.The borrower has the option to repay the loan before maturityarrow_forwardWhy do companies find the issurance of convertible bonds to be an attractive form of financing?arrow_forwardA company issues Non-convertible bond with Equity Warrants. This security is equal to Preferred stock Call Option Convertible Bond Differential Voting Rights Equity sharesarrow_forward
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