Mirrlees Corp. has $3,000,000 bonds convertible into 50 shares per $1,000 bond. Mirrlees has 1,000,000 outstanding shares. Mirrlees has a tax rate of 40%. The average Aa bond yield at the time of issue was 10%. Compute the "diluted earnings per share" if after-tax earnings are $1,400,000.

a)$1.37

b)$1.25

c)$1.33

d)$1.40

What is the difference between the conversion value and conversion premium?

a)The conversion value is the total value received if converted and the conversion premium is the difference between the value of would be received and how much the bond is selling for.

b)The conversion value is the total value of what the bond is selling for and the conversion premium is the difference between the value of would be received and how much the bond is selling for.

c)The conversion value is the total value received if converted and the conversion premium is the difference between the value of would be received and the par value of the stock.

d)There is no difference since conversion value and conversion premium mean the same thing.

All of the following are motivation for firms to issue warrants EXCEPT:

a)Firms may be allowed to issue debt at a lower coupon rate when warrants are included

b)Warrants are used as a sweetener during merger negotiations

c)Warrants are more desirable than convertible securities for creating new common stock

d)All of these options are motivations to issue warrants.

Masco is issuing new 15-year convertible bonds that can be exchanged for 40 shares of stock. The current stock price is 23. If not for the convertibility feature, the bonds would carry a 9% interest rate. However, with the convertibility feature attached the bonds will pay a 7% annual coupon and can still be issued at the par value of $1,000. What is the value of the conversion premium?

a)$20b)$80c)$160d)$210