Please prvide complete answer and correct. Evaluating Annie Hegg’s Proposed Inve

Question

Please prvide complete answer and correct.

Evaluating Annie Hegg’s Proposed Investment In Atilier Industries Bonds. Annie Hegg has been considering investing in the bonds of Atilier Industries. The bonds were issued 5 years ago at their $1,000 par value and have exactly 25 years remaining until they mature. They have an 8.0% coupon interest rate, are convertible into 50 shares of common stock, and can be called any time at $1,080. The bond is rated Aa by Moody’s. Atilier Industries, a manufacturer of sporting goods, recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moody’s and other rating agencies are considering a rating change for Atilier bonds. Recent economic data suggest that expected inflation, currently at 5.0% annually, is likely to increase to a 6.0% annual rate.

Annie remains interested in the Atilier bond but is concerned about inflation, a potential rating change, and maturity risk. To get a feel for the potential impact of these factors on the bond value, she decided to apply the valuation techniques she learned in her finance course.

Respond to the following:

1:   If the price of the common stock into which the bond is convertible rises to $30 per share after 5 years and the issuer calls the bonds at $1,080, should Annie let the bond be called away from her or should she convert it into common stock?

2: For each of the following required returns, calculate the bond’s value, assuming annual interest. Indicate whether the bond will sell at a discount, at a premium, or at par value.

*Required return is 6.0%.

*Required return is 8.0%.

*Required return is 10.0%.

Explanation / Answer

Ans 1

Ans 2

Details Option 1 Option 2 Do not convert to stock Convert to stock Call Premium in excess of Par value (1080-1000)                        80.00 No of Shares to be issued                        50.00 Market Price Per share                        30.00 Total Market value at the end of 5 years                  1,500.00 Gain , if coverted to stock                     500.00 Net Gain ( 500-80), if converted to stock                     420.00 Hence , convert to stock

Ans 2

Details RR 6% RR 8% RR 10% Coupon Rate                          0.08                          0.08           0.08 Coupon payment Per Year( 1000*8%)                        80.00                        80.00         80.00 Remaining Maturit Period in Years                        25.00                        25.00         25.00 PVAF for RR                        12.78                        10.67           9.08 PV of coupon payments                  1,022.67                     853.98       726.16 Par Value at the end of 25th Year                  1,000.00                  1,000.00 1,000.00 DF for RR                          0.23                          0.15           0.09 PV of Face value of Bond                      233.00                     146.02         92.30 Market Value=PV of Coupon Payments+PV of FV of bond                  1,255.67                  1,000.00       818.46

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.