Math
A DMF convertible bond (convertible into 25 shares) has increased 20% above par in market value. Which of the following would you expect the price of the DMF's common stock to be? $48
$1,000 (par) + 20% = $1,200 / 25 shares = $48. Alternatively, it is ordinarily the 20% increase in the value of the common stock that has caused the bond to increase 20% in value. $1,000 divided by 25 shares equals $40 plus 20% equals $48.
An investor sells 10 5% bonds at a profit and buys another 10 bonds with a 5¼% coupon rate. The investor's yearly return will increase by 2.50 per bond
1. first bonds are 5% x1000= and pay $50 per year per bond. 2. second bond purchased = 5.25%x1000=$52.50 3. 52.50-50= 2.50 per bond
The current yield on a bond with a coupon rate of 7.5% currently selling at 105½ is approximately 7.1%.
A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 / $1,055 = 7.109% or approximately 7.1%.
One of your customers owns five JLO 5s of 2042. The debentures have a conversion price of $15. When the market price of the convertible is 80, the parity price of the stock is $12.00.
A debenture with a conversion price of $15 is convertible into 66.66 shares ($1,000 ÷ $15). It is always the par value that is used, not the market price. To determine the parity price of the stock, divide the current market price of $800 by 66.66 and the answer rounds off to $12.
A corporation is having a rights offering. The terms of the offering require eight rights plus $88 to purchase one share. With the stock's current market price at $112 per share, the theoretical value of one right on the ex-rights date is $3.00.
Because the question is asking about the value on the ex-rights, it means we use the regular formula. (market price - the subscription price) / divided by the (number of rights it takes to buy one share). ($112 - $88) ÷ (8) = $24 ÷ 8 = $3.00
KLM Company has 10 million convertible bonds outstanding that are convertible at $25. The bonds contain an antidilution feature. If KLM declares a 10% stock dividend, the new conversion price will be $22.73.
Before the stock dividend, an investor would have received 40 shares of stock for each $1,000 bond ($1,000 / $25). A 10% stock dividend would now give an investor 44 shares on conversion (40 shares + 10% = 4 shares more). $1,000 / 44 shares = $22.73 per share for the new conversion price.
A corporation has an outstanding issue of 8% convertible debentures with a conversion price of $25. The bond indenture contains an antidilutive clause guaranteeing the debt holders the right to maintain proportionate equity conversion in the corporation. If the company pays a 10% stock dividend to its common shareholders, how will that affect the debenture holders? The bonds will now be convertible at approximately 22.73.
The antidilutive provision means the debenture holders will be able to convert into an equivalent share value as before. With a conversion price of $25, the bond is convertible into 40 shares ($1,000 ÷ $25). After the 10% stock dividend, they should be able to have 10% more shares, or 44 shares. That means the conversion price must be reduced. Divide $1,000 by 44 shares and the result is $22.73. Remember, anytime there is a stock dividend, prices go down.
A convertible debenture has a conversion price of $40 per share. If the market value of the debenture rises to a 12.5-point premium over par, which of the following are true? Conversion ratio is 25:1 Parity price of the common stock is $45
The conversion ratio is computed by dividing par value by the conversion price ($1,000 par ÷ $40 = 25). The next step is calculating the market price of the debenture. A 12.5% premium to par means the market price is 112.5% of the $1,000 par. That computes to $1,125.00. Parity price of the common stock is computed by dividing the market price of the convertible debenture by the conversion ratio ($1,125 ÷ 25 = $45). Alternatively, if the debenture is at a 12.5% premium, the common stock will be at parity (equal) when it is selling at 112.5% of the $40 conversion price. Or, 112.5% × $40 = $45.
The board of directors of DMF, Inc., announces a 5, for-4 stock split. The market price of DMF after the split should decrease in value by 20%.
The easy way to handle questions about stock splits is to turn the split into a fraction. You know that after a split, which increases the number of shares outstanding, the market price per share will be reduced. With a 5-for-4 stock split, the new price should be about four-fifths of the old price. A one-fifth change equals 20% (100% / 5 = 20%).
The DERP Corporation has a rights offering. The common stock is currently selling at $45.50. DERP is issuing one new share of stock at $40 per share for each 10 shares owned. What is the theoretical value of one right when the stock is traded ex-rights? $0.55
The formula for the theoretical value of a right when it is ex-rights (Market price ‒ Subscription price) ÷ number of rights needed. Plug in the numbers and you have ($45.50 ‒ $40) divided by 10. That is $5.50 divided by 10 or $0.55 each
What is the amount of interest payable semiannually on a $1,000 par value, 5% corporate bond currently selling at 80 and redeemable at par in 20 years? $25
The interest is based on the par value of $1,000. The current market price is irrelevant. Question is asking what is the amount of semiannual interest 1. 5%x1000 par=$50/2 =25 semi annual interest paid
Four years ago, you declared a net capital loss of $23,000 on your tax return. You have had no further capital gains or losses since then. For that year and the next two, you took the maximum allowable income deduction. How much may you deduct from your income this year, and how much loss will you have to carry forward? $3,000/$11,000
The maximum allowable deduction against income is $3,000. You will have taken four such deductions against $23,000, which leaves you with $11,000 to carry forward
An investor owns ten ABC 6s of 2045. The debentures have a conversion price of $50 with an anti-dilution provision. After ABC distributes a 20% stock dividend, the investor's position will be ten ABC 6s of 2045 with a conversion price of $41.67
This question deals with the anti-dilution provisions of a convertible security. When there is a stock dividend or a stock split, the holder of the convertible maintains the same equity proportion as before. 1. With a conversion price of $50, the debenture is convertible into 20 shares ($1,000 ÷ $50). After a 20% stock dividend, the holder should be able to acquire 20% more shares. That makes the security convertible into 24 shares. Divide the $1,000 par value by 24 shares and the conversion price is now $41.67.
Aenical Corporation issued $100 million of $100 par value preferred stock a number of years ago. The stock pays quarterly dividends of $1.25. Recent issues of comparable preferred stock carry a dividend yield of 4%. One could expect the market price of the Aenical preferred stock to be closest to $125.
This stock is paying an annual dividend of $5 ($1.25 per quarter times four). Investors purchasing this stock expect their return to be approximately 4%, the current rate being paid in the market. The math here needs to first answer "$5 is 4% of what number?" Divide $5 by 4% and the answer is $125. At $125 per share, Aenical stock paying a $5 annual dividend is offering a 4% return on investment.
A 7% convertible debenture is selling at 101. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be $25.25.
To determine the parity price of the common, first find the number of shares the debenture is convertible into (conversion ratio) by dividing par value by the conversion price ($1,000 / $25 = 40 shares). Next, divide the current price of the bond by the conversion ratio. The result is the parity price of the common stock. (1,010 / 40 = $25.25).
ABC Corporation has outstanding a 7.75% convertible debenture currently trading at 102. The bond is convertible into common stock at $40. ABC stock is trading $45 per share. Which of the following statements is true? To profit in this situation, the investor should buy the bonds and short the stock.
With a conversion price of $40, the bond is convertible into 25 shares of ABC common stock ($1,000 / $40 = 25 shares). As the common stock is currently trading at $45 per share, the value of the stock as converted would be $1,125 (25 shares × $45 = $1,125), which is greater than the current price of the bond ($1,020). Therefore, the bond and the stock are not at parity. An investor could profit in this situation by shorting the stock and buying an equivalent number of bonds. A bond could be purchased for $1,020 and immediately converted into stock worth $1,125—a risk-free profit opportunity.
DMF Company has $50 million of convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains a nondilution feature. If DMF declares a 10% stock dividend, the new conversion price will be lower than $50
With an antidilution feature, the issuer will increase the number of shares available upon conversion if the company declares a stock split or stock dividend. This means the bondholder must be able to convert it to more shares, which requires a lower conversion price.
The liquidation order is as follows
secured debt holders, unsecured debt holders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders.
