Question: Please refer below At 31 July 2019, two companies, Eagle Corporation and Dragon Corporation both have in issue 5 million shares of common stocks. In

Please refer below At 31 July 2019, two companies, Eagle Corporation

Please refer below

At 31 July 2019, two companies, Eagle Corporation and Dragon Corporation both have in issue 5 million shares of common stocks. In addition, Eagle Corporation has in issue $5,000,000 of convertible bonds, par value $1,000, carrying an annual coupon rate of 11% and convertible into 400 shares of common stock at any time up to 31 July 2024. The convertible bonds can be redeemed at a price of $1,050 at 31 July 2024. Dragon Corporation has in issue 800,000 warrants, each with an exercise price of $2.50 for one common stock in Dragon Corporation. The warrants can be exercised at any time until 31 July 2024. Reguired: (1) Calculate the value of each convertible bond and each warrant on 31 July 2024, for the following situations: (i) the common stock price of Eagle and Dragon are both $2; (ii) the common stock price of Eagle and Dragon are both $3. (4 marks) (2) Estimate what the market price should have been on 31 July 2019 for each convertible bond if the common stock price on that date was either $2 or $3, given the yield to maturity on ordinary bonds with equivalent risk to Eagle Corporation is 8%. (4 marks) (3) What effect does the expected growth rate of a firm's stock price (subsequent to issue) have on its ability to raise additional funds through convertibles? (2 marks)

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