Problem 20 1 Leasing Connors Construction needs a piece of equipment that can be leased or purchased The equipment costs $50 One option is borrow $50 from the local bank and use the money to buy the equipment The other option is to lease the equipment The company's balance sheet prior to the equipment purchase or lease is shown below Current assets $400 Dept $850 Fixed assets 800 Equity 350 Total assets $1,200 Total liabilities and equity $1,200 What would the company's debt ratio if it chose to purchase the equipment Round your answer to one decimal The companys debt ratio is What would be the company's debt ratio if it leased the equipment and it could keep the lease off its balance sheet Round your answer to one decimal If the company leases the asset and does not capitalize the lease, its debt ratio is Problem 20 2 Warrants Gregg Company recently issued two types of bonds The first issue consisted of 20 year straight (no warrants attached) bonds with an 10 annual coupon The second issue consisted of 20 year bonds with a 8 annual coupon with warrants attached Both bonds were issued at par ($700) What is the value of the warrants that were attached to the second issue Round your answer to the nearest cent $ Problem 20 3 Convertibles Petersen Securities recently issued convertible bonds with a $1,230 par value The bonds have a conversion price of $41 per share What is the bonds' conversion ratio, CR Round your answer to the whole number shares Problem 20 4 Balance sheet effects of leasing Two textile companies, McDaniel Edwards Manufacturing and Jordan Hocking Mills, began operations with identical balance sheets A year later both required additional manufacturing capacity at a cost of $300,000 McDaniel Edwards obtained a 5 year, $300,000 loan at an 8 interest rate from its bank Jordan Hocking, on the other hand, decided to lean the required $300,000 capacity from National Leasing for 5 years an 8 return was build into the lease The balance sheet for each company, before the asset increase, is as follows Debt $300,000 Equity $300,000 Total assets $600,000 Total liabilities and equity $600,000 Show the balance sheet of each firm after the assets, and calculate each firm's new debt ratio (Assume that Jordan Hocking's lease is kept off the balance sheet ) Round your answers to the whole number Debt assets ratio for McDaniel Edwards Debt assets ratio for Jordan Hocking Show how Jordan Hocking's balance sheet would have looked immediately after the financing if had capitalized the lease Round your answer to the whole number Wouldtherateofreturn(1)onassetsand(2)onequitybeafterbythechoiceoffinancing Ifso,how Theinputintheboxbelowwillnotbegraded,butmaybereviewedandconsideredbyyourinstructor Problem 20 12 Warrants Srorm Software wants to issue $90 million ($900 x 100,000 bonds) in new capital to fund new opportunities If Storm raised the $90 million of new capital in a straight debt 20 year bond offering, Storm would have to offer an annual coupon rate of 10 However, Storm's advisers have suggested a 20 year bond offering with warrants According to the advisers, Storm could issue 8 annual coupon bearing debt with 20 warrants per $900 face value bond Storm has 10 million shares of stock outstanding at a current price of $20 The warrants can be exercised in 10 years (on December 31, 2025) at an exercise price of $25 Each warrant entitles its holder to buy one share of Storm Software stock After issuing the bonds with warrants, Storm's operations and investments are expected to grow at a constant rate of 9 3 per year If investors pay $900 for each bond, what is the value of each warrant attached to the bond issue Round your answer to the nearest cent $ Whatisthecomponentcostofthesebondswithwarrants Roundyouranswertotwodecimalplaces Whatpremiumisassociatedwiththewarrants Roundyouranswertotwodecimalplaces 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 from 11 to zero Assume that the dividend at the time of the drop is $3 06 The company's credit strength is not impaired, and its value of is also unchanged What would happen (1) to the stock price and (2) to the convertible bond's price Be as precise as you can Round your answer to the nearest percent Percentage decline in stock price is Percentage decline of in the value of the convertible

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Problem 20-1 Leasing Connors Construction needs a piece of equipment that can be leased or purchased. The equipment costs $50. One option is borrow $50

Problem 20-1

Leasing

Connors Construction needs a piece of equipment that can be leased or purchased. The equipment costs $50. One option is borrow $50 from the local bank and use the money to buy the equipment. The other option is to lease the equipment. The company's balance sheet prior to the equipment purchase or lease is shown below:

Current assets	$400	Dept	$850
Fixed assets	800	Equity	350
Total assets	$1,200	Total liabilities and equity	$1,200

What would the company's debt ratio if it chose to purchase the equipment? Round your answer to one decimal.

The companys debt ratio is %.

What would be the company's debt ratio if it leased the equipment and it could keep the lease off its balance sheet? Round your answer to one decimal.

If the company leases the asset and does not capitalize the lease, its debt ratio is %_______

Problem 20-2

Warrants

Gregg Company recently issued two types of bonds. The first issue consisted of 20-year straight (no warrants attached) bonds with an 10% annual coupon. The second issue consisted of 20-year bonds with a 8% annual coupon with warrants attached. Both bonds were issued at par ($700). What is the value of the warrants that were attached to the second issue? Round your answer to the nearest cent.

$_____

Problem 20-3

Convertibles

Petersen Securities recently issued convertible bonds with a $1,230 par value. The bonds have a conversion price of $41 per share. What is the bonds' conversion ratio, CR? Round your answer to the whole number.

Problem 20-4

Balance sheet effects of leasing

Two textile companies, McDaniel-Edwards Manufacturing and Jordan-Hocking Mills, began operations with identical balance sheets. A year later both required additional manufacturing capacity at a cost of $300,000. McDaniel-Edwards obtained a 5-year, $300,000 loan at an 8% interest rate from its bank. Jordan-Hocking, on the other hand, decided to lean the required $300,000 capacity from National Leasing for 5 years; an 8% return was build into the lease. The balance sheet for each company, before the asset increase, is as follows:

Debt	$300,000
Equity	$300,000
Total assets	$600,000	Total liabilities and equity	$600,000

Show the balance sheet of each firm after the assets, and calculate each firm's new debt ratio. (Assume that Jordan-Hocking's lease is kept off the balance sheet.) Round your answers to the whole number.Debt/assets ratio for McDaniel-Edwards = %Debt/assets ratio for Jordan-Hocking = %
Show how Jordan-Hocking's balance sheet would have looked immediately after the financing if had capitalized the lease. Round your answer to the whole number.%
Wouldtherateofreturn(1)onassetsand(2)onequitybeafterbythechoiceoffinancing?Ifso,how?Theinputintheboxbelowwillnotbegraded,butmaybereviewedandconsideredbyyourinstructor.

Problem 20-12

Warrants

Srorm Software wants to issue $90 million ($900 x 100,000 bonds) in new capital to fund new opportunities. If Storm raised the $90 million of new capital in a straight-debt 20-year bond offering, Storm would have to offer an annual coupon rate of 10%. However, Storm's advisers have suggested a 20-year bond offering with warrants. According to the advisers, Storm could issue 8% annual coupon-bearing debt with 20 warrants per $900 face value bond. Storm has 10 million shares of stock outstanding at a current price of $20. The warrants can be exercised in 10 years (on December 31, 2025) at an exercise price of $25. Each warrant entitles its holder to buy one share of Storm Software stock. After issuing the bonds with warrants, Storm's operations and investments are expected to grow at a constant rate of 9.3% per year.

If investors pay $900 for each bond, what is the value of each warrant attached to the bond issue? Round your answer to the nearest cent. $
Whatisthecomponentcostofthesebondswithwarrants?Roundyouranswertotwodecimalplaces.%Whatpremiumisassociatedwiththewarrants?Roundyouranswertotwodecimalplaces.%

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 from 11% to zero. Assume that the dividend at the time of the drop is $3.06. The company's credit strength is not impaired, and its value of is also unchanged. What would happen (1) to the stock price and (2) to the convertible bond's price? Be as precise as you can. Round your answer to the nearest percent.

Percentage decline in stock price is %.

Percentage decline of % in the value of the convertible