5 point 8. Mr. Joseph is a warrant holder at Green Co. He can purchase 1 share of stock per warrant at a price of $56. The current market price is $52 per share. Assume that after 1 year, the stock price would increase to reach $62 per share. Which of the following statements is correct?* 5. ABC company currently sells 7% convertible debentures for $950. Each debenture can be converted into 18 shares of common stock at any time before 2023. ABC stocks are expected to grow at a constant rate of 6.5% annually. Thus, its expected market price after 4 years is $48.886. What is the current conversion value of the bond? * 7. TRL Co. needs to raise $60 million to expand its business internationally. It currently has 10 million shares outstanding which sells for $52 and has an expected growth rate of 5.5% annually. The investment banker suggests to raise the needed capital by selling 30-year convertible debentures at $1,000 par value. The coupon rate will be equal to 9% and each debenture could be converted into 35 shares of stock. The bonds would be noncallable for 10 years after which they would be callable at a price of $1,105. This call price would decline by $4 per year in year 11 and thereafter. Assume that bonds may be called or converted only at the end of a year. Also, assume that the management would call eligible bonds if the conversion value exceeds 40% of par value. At what year do you expect the bonds will forced into conversion with a call? O Mr. Joseph would exercise his warrant; thus, he would get an exercise value of $6 O $700.00 O Mr. Joseph would exercise his warrant; thus, he would get an exercise value of $10 $527.77 O Mr. Joseph would not exercise his warrant; thus, he would get an exercise value of $0 O $684.00 Mr. Joseph would not exercise his warrant; thus, he would get an exercise value of ($4) O $1,132.02 O None of the above O Year 11 O None of the above Year 12 Year 13 5 points Year 14 1. Which of the following statements about convertibles is most CORRECT? 6. Ella Co. is selling a 15-year coupon bond with 25 warrants attached. The annual coupon payment is 10% and the bond is issued at par. Assume that the current yield on a similar straight bond is 13%. What is the value of each warrant? * 0 None of the above that the issuer receives additional One advantage of convertibles over warrants cash money when convertibles are converted. O $5.51 Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt. At the time it is issued, a convertible's conversion (or exercise) price is generally set equal to or below the underlying stock's price. O $6.23 OO $6.87 O $7.75 For equilibrium to exist, the expected return on a convertible bond must normally be Obetween the expected return on the firm's otherwise similar straight debt and the expected return on its common stock 0 None of the above