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Chapter 5: Q4DQ (page 622)

The price of Haltom Corporation 5录 2019 convertible bonds is \(1,380. For the Williams Corporation, the 61/8 2018 convertible bonds are selling at \)725. (LO19-3)

a. Explain what factors might cause their prices to be different from their par values of $1,000.

b. What will happen to each bond鈥檚 value if long-term interest rates decline?

Short Answer

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Answer

  1. Halton Corporation bonds are having $1,380 par value because its common stock has increased substantially. Williams Corporation bonds are having $725 par value because its common stock decreased probably.

  2. Halton Corporation bond value will have little or no impact. Whereas Williams Corporation bond value will go up somewhat in value.

Step by step solution

01

(a) The factors might cause their prices to be different from their par values

Halton bonds are above par value because its common stock has presumably hiked significantly. On the other hand in the case of Williams, it is reasonable to expect that its common stock has decreased. Also, its interest rate is likely well below the going market rate because of its low security price.

02

(b) Effect on each bond’s value if long-term interest rates decline

With the Halton Corporation, there would be minimal or zero impact. It is controlled by the value of its common stock. In case of Williams Corporation, its potential value is fairly connected with interest rates, so it is likely to go up somewhat in value.

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Most popular questions from this chapter

How would you define efficient security markets?

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.

d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public.

Explain how the zero-coupon rate bond provides return to the investor. What are the advantages to the corporation? (LO16-2)

In addition to U.S. corporations, what government groups compete for funds in the U.S. capital markets?

Question: Barton Simpson, the chief financial officer of Broadband Inc. could hardly believe the change in interest rates that had taken place over the last few months. The interest rate on A2 rated bonds was now 6 percent. The \(30 million, 15-year bond issue that his firm has outstanding was initially issued at 9 percent five years ago. Because interest rates had gone down so much, he was considering refunding the bond issue. The old issue had a call premium of 8 percent. The underwriting cost on the old issue had been 3 percent of par, and on the new issue it would be 5 percent of par. The tax rate would be 30 percent and a 4 percent discount rate would be applied for the refunding decision. The new bond would have a 10-year life. Before Barton used the 8 percent call provision to reacquire the old bonds, he wanted to make sure he could not buy them back cheaper in the open market.

a. First compute the price of the old bonds in the open market. Use the valuation procedures for a bond that were discussed in Chapter 10 (use annual analysis). Determine the price of a single \)1,000 par value bond.
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