# Question

Tulsa Drilling Company has $1 million in 11 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 40, the stock price is $32, and the bonds mature in 10 years. The bonds are currently selling at a conversion premium of $70 over the conversion value.

a. If the price of Tulsa Drilling Company common stock rises to $42 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 on this date next year, the conversion premium has shrunk from $70 to $20.

b. Assume the yield on similar nonconvertible bonds has fallen to 8 percent at the time of sale. What would the pure bond value be at that point? (Use semiannual analysis.) Would the pure bond value have a significant effect on valuation then?

a. If the price of Tulsa Drilling Company common stock rises to $42 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 on this date next year, the conversion premium has shrunk from $70 to $20.

b. Assume the yield on similar nonconvertible bonds has fallen to 8 percent at the time of sale. What would the pure bond value be at that point? (Use semiannual analysis.) Would the pure bond value have a significant effect on valuation then?

## Answer to relevant Questions

ABC has two financing alternatives. Calculate APY for each alternative.a. A publicly placed $20 million bond issue. Issuance costs are $1 million the bonds have a 7% coupon paid SEMI-ANNUAL with a 10-year life.b. A privately ...Investment analysts generally believe the interest rate on bonds is inversely related to the prime interest rate for loans; that is, bonds perform well when lending rates are down and perform poorly when interest rates are ...IRR v. MIRR Valuation Methods Use of Real Options Theory in Financial Management/Modeling Debate the Theories of Accounting for Stock Options Use of Derivatives in Risk Management Use of SCM as a Method of Inventory Control ...Capital Corp. is expecting to generate after-tax income of $49,709 over each of the next three years. The average book value of their equipment over that period will be $230,532. The project’s average accounting rate of ...Assume that you are considering two projects which are mutually exclusive. Project X3 will cost $400,000 and will return $200,000 per year for three years. Project Y6 will cost $300,000 and will return to you $100,000 per ...Post your question

0