(6) If the corporate tax rate is 40%, what is the after-tax cost of the bond with...
Question:
(6) If the corporate tax rate is 40%, what is the after-tax cost of the bond with warrants?
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d. As an alternative to the bond with warrants, Mr. Duncan is considering convertible bonds. The firm’s investment bankers estimate that EduSoft could sell a 20-year, 8.5% coupon (paid annually), callable convertible bond for its $1,000 par value, whereas a straight-debt issue would require a 10% coupon (paid annually).
The convertibles would be call protected for 5 years, the call price would be $1,100, and the company would probably call the bonds as soon as possible after their conversion value exceeds $1,200. Note, though, that the call must occur on an issue-date anniversary. EduSoft’s current stock price is $20, its last dividend was $1, and the dividend is expected to grow at a constant 8% rate.
The convertible could be converted into 40 shares of EduSoft stock at the owner’s option.
Step by Step Answer:
Financial Management Theory And Practice
ISBN: 9781439078105
13th Edition
Authors: Eugene F. Brigham, Michael C. Ehrhardt