in470 elbook Problem Walk Through O'Brien Computers Inc needs to nse $35 million to begin producing a new microcomputer O'Bien nonconvertible debentures currently yield 14%. Its stock sells for $38 per share the last dividend was $2.35; and the expected growth rate is a constant $10%. Investment bankers have tentatively proposed that O'Brien raise the $35 million by issuing convertible debentures. These convertibles would have a $1,200 par value, carry an annual coupon rate of 9%, have a 20-year maturity, and be convertible into 22 shares of stock. The bonds would be noncalable for 5 years, after which they would be callable at a pnce of $1,250;this coll price would decline by S4 per year in Year 6 and each year thereafter Management has called convertibles in the past and presumably will call them again in the future), once they were eligible for call, as soon as their conversion value was about 25% above their par value (not their call price); Choose the graph, representing the expectations set forth in the problem. "Conversion valy valy Expected market price 1600 A M Straight-Bond value +400 10.12 14 16 18 20 X MINDTAP n470 B. Technversion value Expected market price +1-400 M Straight-Bond value -400 4.98 10.12. 14. 16.12_20_* + pected market price Conversion value 11600 M Straight- Bond value +400 314 19.12.14 16 18_20 X expected market price Conversion value -1600 M Straight Bond value 10.214.10.12.20 D. Expected market price Convention value +1600 M Straight- Bond value 400 10.12.18.18.12.2014 The correct graph is Select b. Suppose the previously outlined projects work out on schedule for 2 years, but then O'Brien begins to experience extremely strong competition from Japanese firms. As a result, O'Brien's expected growth rate drops from 10% to zero. Assume that the dividend at the time of the drop is $2.84. The company's credit strength is not impaired, and its value of F, is also unchanged. What would happen (1) to the stock price and (2) to the convertible bond's pnce? Be as precise as you can. Do not round intermediate calculations. Round your answers to the nearest whole number, Percentage decline in stock price is % Percentage decline of % in the value of the convertible. in470 elbook Problem Walk Through O'Brien Computers Inc needs to nse $35 million to begin producing a new microcomputer O'Bien nonconvertible debentures currently yield 14%. Its stock sells for $38 per share the last dividend was $2.35; and the expected growth rate is a constant $10%. Investment bankers have tentatively proposed that O'Brien raise the $35 million by issuing convertible debentures. These convertibles would have a $1,200 par value, carry an annual coupon rate of 9%, have a 20-year maturity, and be convertible into 22 shares of stock. The bonds would be noncalable for 5 years, after which they would be callable at a pnce of $1,250;this coll price would decline by S4 per year in Year 6 and each year thereafter Management has called convertibles in the past and presumably will call them again in the future), once they were eligible for call, as soon as their conversion value was about 25% above their par value (not their call price); Choose the graph, representing the expectations set forth in the problem. "Conversion valy valy Expected market price 1600 A M Straight-Bond value +400 10.12 14 16 18 20 X MINDTAP n470 B. Technversion value Expected market price +1-400 M Straight-Bond value -400 4.98 10.12. 14. 16.12_20_* + pected market price Conversion value 11600 M Straight- Bond value +400 314 19.12.14 16 18_20 X expected market price Conversion value -1600 M Straight Bond value 10.214.10.12.20 D. Expected market price Convention value +1600 M Straight- Bond value 400 10.12.18.18.12.2014 The correct graph is Select b. Suppose the previously outlined projects work out on schedule for 2 years, but then O'Brien begins to experience extremely strong competition from Japanese firms. As a result, O'Brien's expected growth rate drops from 10% to zero. Assume that the dividend at the time of the drop is $2.84. The company's credit strength is not impaired, and its value of F, is also unchanged. What would happen (1) to the stock price and (2) to the convertible bond's pnce? Be as precise as you can. Do not round intermediate calculations. Round your answers to the nearest whole number, Percentage decline in stock price is % Percentage decline of % in the value of the convertible
