Problem Set 1(Debt Claim Priority)

Your company has fixed assets worth $200 million and net working capital worth $100 million. It is financed partly by equity and partly by three issues of debt. These consist of $250 million of First Mortgage Bonds secured only on the company's fixed assets, $100 million of senior debentures, and $120 million of subordinated debentures. If your company just declared bankruptcy and all debt are due today, how much would each debtholder be entitled to receive?

(a) Investors of mortgage bonds will receive $____ from fixed assets and $____ from net working capital.

(b) Investors of senior debentures will receive $____ from fixed assets and $____ from net working capital.

(c) Investors of subordinated debentures will receive $____ from fixed assets and $____ from net working capital.

Problem Set 2(Convertible bonds)

Your company issued several types of convertible bonds to bondholders in the past. Among them, the 10%-coupon convertible bond with a $1,000 par value is about to mature in 30 days. The conversion ratio is 27.

(a) What is the conversion price?

(b) If the stock price is $47 today, should you convert now? Why?