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Chapter 5: 8DQ (page 524)

Under what circumstances would a call on a bond be exercised by a corporation? What is the purpose of a deferred call? (LO16-3)

Short Answer

Expert verified

A corporation exercises a call on a bond in case of repayment before the maturity date.

On the other hand, a deferred call ensures that bondholders will not surrender their securities before 5 to 10 years.

Step by step solution

01

Call on a bond

A call on a bond is one of the features of repayment of bonds that facilitates the corporation to retire the bonds before their due date.

02

Purpose of a deferred call

The corporations exercise call on a bond when interest rates on new securities are lower than the previously issueddebt.

The primary purpose of a deferred call is to ensure that bondholders will not ask for the retirement of their dues for at least initial 5 or 10 years.

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Most popular questions from this chapter

Take the following list of securities and arrange them in order of their priority of claims: (LO16-1)

Preferred stock Senior debenture

Subordinated debenture Senior secured debt

Common stock Junior secured debt

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

a. Compute the net proceeds to Tyson Iron Works.

What method of 鈥渂ond repayment鈥� reduces debt and increases the amount of common stock outstanding? (LO16-3)

The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of \(6,910,000 in the current year. The company is considering the issuance of 1 million additional shares that can only be issued at \)30 per share.

a. Assume that Hamilton Corporation Company can earn 7.0 percent on the proceeds. Calculate the earnings per share.

b. Should the new issue be undertaken based on earnings per share?

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

c. Compute the earnings per share immediately after the stock issue.
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