1) Monte Inc. has a $1,000 face value convertible bond issue that is currently selling in the market for $950. Each bond is exchangeable at any time for 25 shares of the companys stock. The convertible bond has a 7% coupon, paid semi-annually. Similar non-convertible bonds are yielding 9%. The bond matures in 10 years. Stock in Monte Inc. sells for $37 per share. (5 marks)

a) What is the conversion ratio & the conversion price?

b) What is the straight bond value? The conversion value? What is the option (or premium) value of the bond?

c) What would the stock price have to be for the conversion value and the straight bond value to be equal?

2) Red Dog has announced a rights offering to raise $60 million. Its stock currently sells for $55 per share and there are 4.5 million shares outstanding. The subscription price is set at $40 per share.(5 marks)

a) How many shares must be sold?

b) How many rights will it take to buy one share?

c) Assuming the stock is still worth $55 when the stock goes ex rights, what is the value of a right?

d) What is the value of a share once the rights are detached?