Question

Harvester Inc. has net income of $75,000,000 and 15,000,000 shares of common stock outstanding. Several years ago it issued 10,000, 8% coupon, 30 year convertible debentures at a par value of $1,000. The conversion price was set at $25 the price of the stock at the time was about $18. The company is taxed at a total effective rate of 35% and regularly pays an annual dividend of $0.50 per share. The bond issue included a call feature with a call premium of two years coupon interest and a 5 year period of call protect which has now past. Management thought the stock price would increase steadily over the next few years and anticipated a quick conversion into equity but that hasn’t happened. The stock is now selling for $30 and management is considering a call hopefully to force conversion.
a. Calculate Harvester’s Basic and Fully Diluted EPS.
b. What is annual the cash flow impact on the company of conversion of all the bonds?
c. Evaluate a bondholders’ position at this time. Why haven’t they converted?
d. Will a call force conversion? Why? That is, what is difference in value for each bond between conversion and call?
e. Why does management prefer conversion to call?


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  • CreatedMay 14, 2015
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