Reference no: EM132746182

Question 1 - Standard Olive Company of British Columbia has a convertible bond outstanding with a coupon rate of 9 percent payable semiannually, and a maturity date of 15 years. The bond maturity value is $1,000. It is rated A, and competitive nonconvertible bonds of the same risk class carry a 10 percent return. The conversion ratio is 25. Currently, the common stock is selling for $30 per share on the Venture Exchange.

Required -

a. What is the conversion price?

b. What is the conversion value?

c. Calculate the pure bond value.

d. Calculate the share price at the crossover point (when the pure bond value equals conversion value).

Question 2 - Vernon Glass Company has $20 million in 10 percent convertible bonds outstanding. The conversion ratio is 50, the share price is $19, and the bond matures in 10 years. The bonds are currently selling at a conversion premium of $70 over their conversion value.

If the price of the common shares rises to $25 on this date next year, what would your rate of return be if you bought a convertible bond today and sold it in one year? Assume that in one year the conversion premium has shrunk from $70 to $15.

Question 3 - Mr. John Hailey has $1,000 to invest in the market. He is considering buying 50 shares of the Comet Airlines at $20 per share. His broker suggests that he may wish to consider purchasing warrants instead. The warrants are selling for $5, and each warrant allows him to purchase one share of Comet Airlines common stock at $18 per share.

a. How many warrants can Mr. Hailey purchase for the same $1,000?

b. If the price of the stock goes to $30, what would be his total dollar and percentage return on the shares?

c. At the time the shares go to $30, the speculative premium on the warrant goes to zero (though the intrinsic value of the warrant goes up). What would be Mr. Hailey's total dollar and percentage return on the warrant?

d. Assuming the speculative premium remains $3.50 over the intrinsic value, how far would the price of the stock have to fall before the warrant has no value?