Chapter 17: 12.

Calculate the straight bond value for each of the bonds shown in the table below: Bond A B C D Par Value $1000 800 1000 1000 Coupon interest rate (paid annually) 10% 12 13 14 Interest rate on equal-risk straight bond 14% 15 16 17 Years to maturity 20 14 30 25

14. Determining values- Convertible bond Craigs Cake Company has an outstanding issue of 15-year convertible bonds with a $1000 par value. These bonds are convertible into 80 shares of common stock. They have a 13% annual coupon interest rate, whereas the interest rate on straight bonds of similar risk is 16%. a. Calculate the straight bond value of this bond. b. Calculate the (conversion for stock) value of the bond when the market price is $9, $12, $13, $15, and $20 per share of C/S. c. For each of the C/S prices given in part b, at what price would you expect the bond to sell? Why? d. Graph the straight value and conversion value of the bond for each C/S price given. Plot the per-share C/S price on the x-axis and the bond values on the y-axis. Use this graph to indicate the minimum market value of the bond associated with each C/S price. 16. Evaluation of the implied price of the attached warrant Dinoo Mathur wishes to determine whether the $1000 price asked for Stanco Manufacturings bond is fair in light of the theoretical value of the attached warrants. The $1000 par value, 30-year, 11.5%-coupon interest rate bond pays annual interest and has 10 warrants attached for purchase of C/S. The theoretical value of each warrant is $12.50. The interest rate on an equal-risk straight bond is currently 13%. a. Find the straight value of Stanco Manufacturings bond. b. Calculate the implied of all warrants attached to Stancos bond. c. Calculate the implied of each warrant attached to Stancos bond. d. Compare the implied price for each warrant calculated in part c to its theoretical value. On the basis of this comparison, what assessment would you give Dinoo with respect to the fairness of Stancos stock price? Explain. 18. C/S vs warrant investment Susan Michaels is evaluating the Burton Tool Companys C/S and warrants to choose the better investment. The firms stock is currently selling for $50 per share; its

warrants to purchase three shares of C/S at $45 per share are selling for $20. Ignoring transaction costs, Ms. Michaels has $8,000 to invest. She is quite optimistic with respect to Burton because she has certain inside information about the firms prospects with respect to a large govt contract. a. How many shares of stock and how many warrants can Ms. Michaels purchase? b. Suppose Ms. Michaels purchased the stock, held it 1 year, and then sold it for $60 per share. What total gain would she realize, ignoring brokerage fees and taxes? c. Suppose Ms. Michaels purchased warrants and held them for 1 year and the market price of the stock increased to $60 per share. Ignoring brokerage fees and taxes, what would be her total gain if the market value of the warrants increased to $45 and she sold out? d. What benefit, if any, would the warrants provide? Are there any differences in the risk of these two alternative investments? Explain. 20. Options profits and losses For each of the 100-share options shown in the following table, use the underlying stock price at expiration and other information to determine the amount of profit or loss an investor would have had, ignoring brokerage fees. Option Type of Option Cost of Option Strike Price per share $50 42 60 35 28 Underlying stock price per share at expiration $55 45 50 40 25

A B C D E

Call Call Put Put Call

$200 350 500 300 450

22. Put Option Ed Martin, the pension fund manager for Stark Corporation, is considering purchase of a put option in anticipation of a price decline in the stock of Carlisle, Inc. The option to sell 100 shares of Carlisle, Inc., at any time during the next 90 days at a strike price of $45 can be purchased for $380. The stock of Carlisle is currently selling for $46 per share. a. Ignoring any brokerage fees, or dividends, what profit or loss will Ed make if he buys the option and the lowest price of Carlisle stock during the 90 days is $46, $44, $40, and $35? b. What effect would the fact that the price of Carlisles stock slowly rose from the initial $46 level to $55 at the end of 90 days have on Eds purchase? c. In light of your findings, discuss the potential risks and return from using put options to attempt to profit from an anticipated decline in share price.

Chapter 18

8. EPS and merger terms Cleveland Corporation is interested in acquiring Lewis Tool Company by swapping 0.4 share of its stock for each share of Lewis stock. Certain financial data on these companies are given in the following table. Item Earnings Available for C/S # 0f shares of C/S outstanding EPS MP per share Price/Earnings ratio Cleveland Corporation $200,000 50,000 $4.00 $50.00 12.5 Lewis Tool $50,000 20,000 $2.50 $15.00 6

Cleveland has sufficient authorized but unissued shares to carry out the proposed merger. a. b. c. d. How many new shares of stock will Cleveland have to issue to make the proposed merger? If the earnings for each firm remain unchanged, what will the postmerger earnings per share be? How much, effectively, has been earned on behalf of each of the original shares of Lewis stock? How much, effectively, has been earned on behalf of each of the original shares of Cleveland Corporations stock?

10. Expected EPS-Merger Decision Graham and Sons wishes to evaluate a proposed merger into the RCN Group. Graham had 2012 earnings of $200,000, has 100,000 shares of common stock outstanding, and expects earnings to grow at an annual rate of 7%. RCN had 2012 earnings of $800,000, has 200,000 shares of common stock outstanding, and expects its earnings to grow at 3% per year. a. Calculate the expected earnings per share (EPS) for Graham & Sons for each of the next 5 years (2013-2017) without the merger. b. What would Grahams stockholders earn in each of the next 5 years (2013-2017) on each on each of their Graham shares wrapped for RCN shares at a ratio of (1) 0.6 and (2) 0.8 share of RCN for 1 share of Graham? c. Graph the premerger and postmerger EPS figures developed in parts a and b with the year on the x-axis and the EPS on the y-axis. d. If you were the financial manager for Graham & Sons, which would you recommend from part b, (1) or (2)? Explain your answer.

11. EPS and postmerger price Data for Henry Company and Mayer Services are given in the following table. Henry Company is considering merging with Mayer by swapping 1.25 shares of its stock for each share of Mayer stock. Henry Company expects its stock to sell at the same price/earnings (P/E) multiple after the merger as before merging.

Item Earnings available for C/S # of shares of C/S outstanding MP per share

Henry Company $225,000 90,000 $45

Mayer Services $50,000 15,000 $50

a. b. c. d. e.

Calculate the ratio of exchange in market price. Calculate the EPS and (P/E) ratio for each company Calculate the (P/E) ratio used to purchase Mayer Services. Calculate the postmerger EPS for Henry Company. Calculate the expected MP per share of the merged firm. Discuss this result in light of your findings in part a.

12. Holding Company Scully Corp. holds enough stock in company A and company B to give it voting control of both firms. Consider the accompanying simplified balance sheets for these companies. Kulang =(