Q- Search Sheet Formulas View Share Comments AutoSaveF DO 55 - Home Insert DrawPage Layout Arial 10 Poste BIV A E40 fx Data Review = E = a Ch20 POB Build a Model Tell me what you want to do wao Text Currency Margo Centar 5 %) C D D- D L e lete - 27" Sort & Filter T Delete Format he S Sensitivity A EE Ideas Sensitivity, Formatting as Table Styles X D E F G H M NOP 20 2 Chapter 3 Problem: 7 Maggie's Magazines (MM) has straight nonconvertible bond that currently yield 9%. MM's stock sells for $22 per share, has an 8 expected constant growth rate of 6%, and has a dividend yield of 4$. MM plans on issuing convertible bonds that will have a 9 $1,000 par value, a coupon rate of 8%, a 20-year maturity, and a conversion ratio of 32 (I.e., each bond could be convertible Into 32 10 shares of stock). Coupon payments will be made annually. The bonds will be noncallable for 5 years, after which they will be 11 callable at a price of $1,90; this call price would decline by $6 per year in Year 6 and each year thereafter. For simplicity, assume 12 that the bonds may be called or converted only at the end of a year, immediately after the coupon and dividend payments. 13 Management will call the bonds when the bonds' conversion value exceeds 25% of the bonds' par value (not their call price). $22.00 4% $1,000.00 6.00% 16 Inputs: 17 Straight bond yield 18 Current stock price 19 Expected growth rate in stock price 20 Dividend yield 21 Par value (and Issue price) of convertible bond 22 Coupon rate on convertible bond 23 Maturity of convertible bond (years) 24 Conversion ratio 25 Call protection period (years) 26 Call price when call protection ends 27 Call price decline per year after protection period Policy for call: Call when conversion value exceeds this 28 percent over bond's par value. 20 $1,090.00 $6.00 25% 30 31 a. For each year, calculate: (1) the anticipated stock price; (2) the anticipated conversion value; (3) the anticipated straight-bond 32 price; and (4) the cash flow to the investor assuming conversion occurs. At what year do you expect the bonds will be forced into 33 conversion with a call? What is the bond's value in conversion when it is converted at this time? What is the cash flow to the 34 bondholder when it is converted at this time (Hint: the cash flow includes the conversion value and the coupon payment, because 35 the conversion is immediately after the coupon is paid.) 36 37 Will call the issue in the first year that the conversion 38 Build a Model Ready # - - + 132% Q- Search Sheet Formulas View Share Comments AutoSaveF DO 55 - Home Insert DrawPage Layout Arial 10 Poste BIV A E40 fx Data Review = E = a Ch20 POB Build a Model Tell me what you want to do wao Text Currency Margo Centar 5 %) C D D- D L e lete - 27" Sort & Filter T Delete Format he S Sensitivity A EE Ideas Sensitivity, Formatting as Table Styles X D E F G H M NOP 20 2 Chapter 3 Problem: 7 Maggie's Magazines (MM) has straight nonconvertible bond that currently yield 9%. MM's stock sells for $22 per share, has an 8 expected constant growth rate of 6%, and has a dividend yield of 4$. MM plans on issuing convertible bonds that will have a 9 $1,000 par value, a coupon rate of 8%, a 20-year maturity, and a conversion ratio of 32 (I.e., each bond could be convertible Into 32 10 shares of stock). Coupon payments will be made annually. The bonds will be noncallable for 5 years, after which they will be 11 callable at a price of $1,90; this call price would decline by $6 per year in Year 6 and each year thereafter. For simplicity, assume 12 that the bonds may be called or converted only at the end of a year, immediately after the coupon and dividend payments. 13 Management will call the bonds when the bonds' conversion value exceeds 25% of the bonds' par value (not their call price). $22.00 4% $1,000.00 6.00% 16 Inputs: 17 Straight bond yield 18 Current stock price 19 Expected growth rate in stock price 20 Dividend yield 21 Par value (and Issue price) of convertible bond 22 Coupon rate on convertible bond 23 Maturity of convertible bond (years) 24 Conversion ratio 25 Call protection period (years) 26 Call price when call protection ends 27 Call price decline per year after protection period Policy for call: Call when conversion value exceeds this 28 percent over bond's par value. 20 $1,090.00 $6.00 25% 30 31 a. For each year, calculate: (1) the anticipated stock price; (2) the anticipated conversion value; (3) the anticipated straight-bond 32 price; and (4) the cash flow to the investor assuming conversion occurs. At what year do you expect the bonds will be forced into 33 conversion with a call? What is the bond's value in conversion when it is converted at this time? What is the cash flow to the 34 bondholder when it is converted at this time (Hint: the cash flow includes the conversion value and the coupon payment, because 35 the conversion is immediately after the coupon is paid.) 36 37 Will call the issue in the first year that the conversion 38 Build a Model Ready # - - + 132%