Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles
Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles
CHAPTERSTOCK,
20 LEASING, WARRANTS,
AND CONVERTIBLES
Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject
lines.
Multiple Choice: True/False
(20-1) Preferred stock F O Answer: b EASY
1
. The “preferred” feature of preferred stock means that it normally will
provide a higher expected return than will common stock.
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. True
b. False
a. Bonds with warrants and convertible bonds both have option features
that their holders can exercise if the underlying stock's price
increases. However, if the option is exercised, the issuing
company's debt declines if warrants are used but remains the same if
convertibles are used.
b. Warrants are long-term put options that have value because holders
can sell the firm's common stock at the exercise price regardless of
how low the market price drops.
c. Warrants are long-term call options that have value because holders
can buy the firm's common stock at the exercise price regardless of
how high the stock's price has risen.
d. A firm's investors would generally prefer to see it issue bonds with
warrants than straight bonds because the warrants dilute the value of
new shareholders, and that value is transferred to existing
shareholders.
e. A drawback to using warrants is that if the firm is very successful,
investors will be less likely to exercise the warrants, and this will
deprive the firm of receiving any new capital.
a. $707.33
b. $744.56
c. $783.75
d. $825.00
e. $866.25
a. $40.00
b. $42.00
c. $44.10
d. $46.31
e. $48.62
a. 22.56
b. 23.75
c. 25.00
d. 26.25
e. 27.56
a. $177,169
b. $196,854
c. $207,215
d. $217,576
e. $228,455
a. $110,285
b. $116,090
c. $122,199
d. $128,631
e. $135,401
a. 6.66%
b. 6.99%
c. 7.34%
d. 7.71%
e. 8.09%
a. $ 96
b. $106
c. $112
d. $117
e. $123
a. 7.83%
b. 8.24%
c. 8.65%
d. 9.08%
e. 9.54%
a. 6.75%
b. 7.11%
c. 7.48%
d. 7.88%
e. 8.27%
a. $3.76
b. $3.94
c. $4.14
d. $4.35
e. $4.56
a. $8.00
b. $8.42
c. $8.84
d. $9.28
e. $9.75
a. $720.27
b. $758.18
c. $796.09
d. $835.89
Page 662 M/C Problems Chapter 20: Hybrid Financing
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e. $877.69
a. $652.55
b. $686.89
c. $723.05
d. $761.10
e. $799.16
a. $725.58
b. $763.76
c. $803.96
d. $846.28
e. $888.59
a. $719.90
b. $757.79
c. $797.68
d. $837.56
e. $879.44
a. $1,950
b. $2,052
c. $2,160
d. $2,268
e. $2,382
a. $790.48
b. $830.01
c. $871.51
d. $915.08
e. $960.84
a. $901.28
b. $924.39
c. $948.09
d. $972.41
e. $996.72
a. $609
b. $642
c. $678
d. $715
e. $751
a. $2,852
b. $2,994
c. $3,144
d. $3,301
e. $3,466
a. 10.64%
a. 10.36%
b. 10.91%
c. 11.48%
d. 12.06%
e. 12.66%
Multiple Part:
Problems 57 through 60 must be kept together, as Problems 58-60 use data from 57.
a. 27.14
b. 28.57
c. 30.00
d. 31.50
e. 33.08
a. $698.15
b. $734.89
c. $773.57
d. $814.29
e. $857.14
a. $684.78
b. $720.82
c. $758.76
d. $798.70
Page 668 M/C Problems Chapter 20: Hybrid Financing
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
e. $838.63
a. $698.15
b. $734.89
c. $773.57
d. $814.29
e. $857.14
Years (N) 5
Interest rate (I/YR) 10.0%
Loan amount (PV) $6,000,000
Lease payment $1,790,000
0 1 2 3 4 5
Loan: -6,000,000 PMT PMT PMT PMT PMT
0 1 2 3 4 5 6
Loan: -5,000,000 PMT PMT PMT PMT PMT PMT
0 1 2 3
Purchase analysis:
Net purchase price -$4,800
Maintenance cost -240 -240 -240
Maint. tax savings = Maint × T 96 96 96
Deprec. tax savings 640 640 640
Cash flow -4,800 496 496 496
PV cost of owning (6%) -3,474
Leasing analysis:
Lease payment -2,100 -2,100 -2,100
Tax savings from lease 840 840 840
Cash flow -1,260 -1,260 -1,260
PV cost of leasing (6%) -3,368
Set N = 20, I/YR = 10, PV = -850, FV = 1000 and solve for PMT: $82.38
To get this payment on a $1,000 bond, the coupon rate = PMT/$1000 = 8.24%
Set N = 30, I/YR = 10, PV = -800, and FV = 1000. Then solve for PMT: $78.78
To get this payment on a $1,000 bond, the coupon rate = PMT/$1000 = 7.88%
Find the straight-debt value: N = 20, I/YR = 15, PMT = -120, and FV = -1000. PV = $812.22
Find the straight-debt value: N = 15, I/YR = 9, PMT = -60, and FV = -1000.
PV = $758.18
Find the straight-debt value: N = 20, I/YR = 11, PMT = -80, and FV = -1000.
PV = $761.10
Find the straight-debt value: N = 30, I/YR = 5, PMT = -40, and FV = -1000.
PV = $846.28
Purchase analysis:
0 1 2 3 Totals
Straight-line factor 0.3333 0.3333 0.3333 1.00
Depreciation 1,600 1,600 1,600 4,800
Equipment purchase -$4,800
Maintenance -300 -300 -300
Maint. tax savings (Maint. × T) 105 105 105
Deprec. tax savings (Deprec × T) 560 560 560
Cash flows -4,800 365 365 365
PV cost at I(1 − T) = 5.20% -3,810
Find the straight-debt value: N = 12, I/YR = 9.5, PMT = -65, and FV = -1000.
PV = $790.48
The floor value is the higher of the bond value or the conversion value, so it is $790.48.
The floor value is the higher of the bond value or the conversion value, so it is $972.41
Purchase analysis: 0 1 2 3 4
MACRS factor 0.33 0.45 0.15 0.07
Depreciation 13,200 18,000 6,000 2,800
Equipment purchase -$40,000
Maintenance -1,500 -1,500 -1,500 -1,500
Maint. tax savings (Maint. × T) 525 525 525 525
Deprec. tax savings (Deprec. × T) 4,620 6,300 2,100 980
Residual value 12,000
Tax on residual -4,200
AT residual value 7,800
Total CFs -40,000 3,645 5,325 1,125 7,805
PV cost of buying at I(1 – T) 5.85% -24,638
Lease analysis: 0 1 2 3 4
Lease payment -10,000 -10,000 -10,000 -10,000 0
Tax savings on pmt 3,500 3,500 3,500 3,500 0
AT lease pmt -6,500 -6,500 -6,500 -6,500 0
PV cost of leasing at I(1 – T) 5.85% -23,923
NAL = $715
54. (20-2) Net advantage to leasing C O Answer: a HARD
Lease analysis: 0 1 2 3
Lease payment -23,000 -23,000 -23,000
Tax saving on pmt 4,600 4,600 4,600 0
AT lease pmt -18,400 -18,400 -18,400 0
PV cost of leasing at I(1−T) -51,946
NAL = $2,852
IRR 11.79%
Find the straight-debt value in Year 10: N = 20 – 10 = 10, I/YR = 10.8, PMT = -100, and FV = -1000.
PV = $952.49
The floor value is the higher of the bond value or the conversion value, so it is $1,253.59.
IRR 11.48%
Inputs: N = 10; I/YR = 8; PMT = Coupon rate × Par value = 50; FV = 1,000.
PV = $798.70
The floor price is the higher of the bond's conversion value or straight-debt value. Those values as calculated
above are as follows: