PROBLEMS

$6-1$ Swift Bicycles plans to issue convertible bonds to

finance its future growth. Each convertible bor

a face value equal to $$1,000$ and car

into $25$ shares of common stock. Whi

mum stock price that would make it beneficial for

bondholders to convert their bonds?

$6-2$ Many years ago, Winding Road Maps issued

convertible bond with a conversion ratio equai

to $40.$ The bond's face value is $$1,000.($a$)$ For

how many shares of stock can a bondholder

convert each bond? $($b$)$ At what stock price should

bondholders convert?

$6-3$ Suppose you own a convertible bond that has a

conversion ratio equal to $50.$ Each convertible bond

has a face value equal to $$1,000.$ The current market

value of the company's common stock is $$19,$ and

the bond is selling for $$980.$ If you want to liquidate

your position today because you need money to

pay your rent, should you sell the bond or should

you convert the bond into common stock and then

sell the stock? Explain your answer.

Lightning Electric's outstanding bond has a $$1,000$

maturity value and a $4\mathrm{.}5$ percent coupon rate of

interest $($paid semiannually$).$ The bond, which wasconvertible bond with a

ratio equal

to $40.$ The bond's face value is $$1,000.($a$)$ For

how many shares of stock can a bondholder

convert each bond? $($b$)$ At $w$ price should

bondholders convert?

$6-3$ Suppose you own a convertible isond that has a

conversion ratio equal to $50.$ Each convertible hond

has a face value equal to $$1,000.$ The int rket

value of the company's common stock is $$19,$ and

the bond is selling for $$980.$ If you want to liquidate

your position today because you need money io

pay your rent, should you sell the bond or should

you convert the bond into common stock and then

sell the stock? Explain your answer.

Lightning Electric's outstanding bond has a $$1,000$

maturity value and a $4\mathrm{.}5$ percent coupon rate of

interest $($paid semiannually$).$ The bond, which was

issued five years ago, matures in $10$ years. If inves$-$

tors require a return equal to $6$ percent to invest in

similar bonds, what is the current market v$$lue of

Lightning's bond?

$120$ PART THREE: Valuation$--$Financial Assets