Question
Question 27 DEF Inc. has 10,000 shares of common stock outstanding. In addition, the capital structure contains $100,000 in convertible debentures, paying a 6% coupon
Question 27
DEF Inc. has 10,000 shares of common stock outstanding. In addition, the capital structure contains $100,000 in convertible debentures, paying a 6% coupon rate. The conversion feature calls for a $40 conversion price.
Capital Structure | Income Statement | |||
A/P | $100,000 |
| Before Conversion | After Conversion |
Long-term Debt (7%) | 100,000 | Sales | $200,000 | $200,000 |
Convertible Bonds | 100,000 | COGS | (60,000) | (60,000) |
Total Debt | $300,000 | Operating Expenses | (40,000) | (40,000) |
7% Preferred Stock | 100,000 | Operating Profits | ? | ? |
Common: Par ($0.5) | 5,000 | Interest Expense | ? | ? |
Paid-in Surplus | 195,000 | Taxable Income | ? | ? |
Retained Earnings | 400,000 | Taxes @ 50% | ? | ? |
Total Liabilities & Equity | $1,000,000 | Income Aftertax | ? | ? |
|
| Preferred Dividend | ? | ? |
|
| Earnings Available to Common | ? | ? |
|
| Total Shares | ? | ? |
|
| Earnings Per Share | ? | ? |
(a) Calculate Primary (before conversion) and fully-diluted Earnings per Share (EPS).
(b) Do convertibles violate the risk-return trade-off principle? What are the benefits and potential costs of convertible bonds for issuing firms?
(c) Briefly discuss the similarities and differences (at least one each) between convertible bonds and warrants.
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