United Technology Corporation (UTC) has $40 million of convertible bonds outstanding (40,000 bonds at $1,000 par value) with a coupon rate of 11 percent Interest rates are currently 8 percent for bonds of equal risk The bonds have 15 years left to maturity The bonds may be called at a 9 percent pre...

United Technology Corporation UTC Interest expense 11 40 million 4400000 million Shares created from ...

United Technology Corporation (UTC) has $40 million of convertible bonds outstanding (40,000 bonds at $1,000 par value)

Question:

United Technology (UTC) has $40 million of convertible bonds outstanding (40,000 bonds at $1,000 par value) with a rate of 11 percent. Interest rates are currently 8 percent for bonds of equal risk. The bonds have 15 years left to maturity. The bonds may be called at a 9 percent premium over par. They are convertible into 30 shares of . The tax rate for the company is 25 percent.
The firm’s is currently selling for $41 and it pays a of $3.50 per share. The expected income for the company is $38 million with 6 million shares outstanding.
Thoroughly analyze the bonds and determine whether the firm should call the bond at the
9 percent call premium. In your analysis, consider the following:
a. The impact of the call on basic and diluted earnings per share (assume the call forces conversion).
b. The consequences of your decision on financing flexibility.
c. The net change in cash outflows to the company as a result of the call and conversion.

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