Harvester Inc. has net income of $75,000,000 and 15,000,000 shares of common stock outstanding. Several years ago

Question:

Harvester Inc. has net income of $75,000,000 and 15,000,000 shares of common stock outstanding. Several years ago it issued 10,000, 8% coupon, 30 year convertible debentures at a par value of $1,000. The conversion price was set at $25 the price of the stock at the time was about $18. The company is taxed at a total effective rate of 35% and regularly pays an annual dividend of $0.50 per share. The bond issue included a call feature with a call premium of two years coupon interest and a 5 year period of call protect which has now past. Management thought the stock price would increase steadily over the next few years and anticipated a quick conversion into equity but that hasn’t happened. The stock is now selling for $30 and management is considering a call hopefully to force conversion.

a. Calculate Harvester’s Basic and Fully Diluted EPS.

b. What is annual the cash flow impact on the company of conversion of all the bonds?

c. Evaluate a bondholders’ position at this time. Why haven’t they converted?

d. Will a call force conversion? Why? That is, what is difference in value for each bond between conversion and call?

e. Why does management prefer conversion to call?

Debentures
Debenture DefinitionDebentures are corporate loan instruments secured against the promise by the issuer to pay interest and principal. The holder of the debenture is promised to be paid a periodic interest and principal at the term. Companies who... Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...