You have collected the information about Imaginary Company as follows:

The debt of the company: Par value = $1000, Annual coupon rate = 8%, Coupon payment is paid once a year, time to maturity = 3 years

The current total market value of the firm asset = $1500

The firm's future values follow a two-state path with Up state growth multiple u = 1.2 and Down state growth multiple d = 0.7 each year.

The annual risk-free rate = 2%

Answer the questions below showing your calculations with formulas utilized... (1). What is the value of the firm's debt if it is a straight debt?

(2). What is the value of the bond if it is convertible with a convertible ratio of 4 and 5 shares outstanding?

(3). Suppose there is a Treasury security with the same par value, annual coupon payments, and time to maturity. What is the value of the Treasury security? (Hint: Simply use the DCF model to solve for it.)

(4). Will the Treasury security or the straight corporate bond have the higher price? Why?

(5). Calculate the yield spread between the straight corporate bond and the Treasury security.

(6). Which bond, the straight bond or the convertible bond, has higher price? Why?

Answer rating: 100% (QA)

1 To calculate the value of the firms straight debt we can use the formula for the present value of a bond Debt value Coupon payment 1 Riskfree rate C... View the full answer