Question 1: Pittsburgh Steel Company has a convertible bond outstanding, trading in the marketplace at $930. The par value is $1,000, the coupon rate is 8 percent, and the bond matures in 25 years. The conversion price is $50 and the company's common stock is selling for $44 per share. Interest is paid semiannually.
a. What is the conversion value?
b. If similar bonds, which are not convertible, are currently yielding 10 percent, what is the pure bond value of this convertible bond?
Question 2: In problem above, if the interest rate on similar bonds, which are not convertible, goes up from 10 percent to 12 percent, what will be the new pure bond value of the Pittsburgh Steel Company bonds? Assume the Pittsburgh Steel Company bonds have the same coupon rate of 8 percent as described in problem 13 and that 25 years remain to maturity. Use semiannual analysis.
Question 3: The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Based on the following facts, is she correct? (Show calculations to prove your answer.)
Debt can be issued at a yield of 10.6 percent, and the corporate tax rate is 35 percent. Preferred stock will be priced at $50, and pay a dividend of $4.40. The floatation cost on the preferred stock is $2.