【正文】 Copyright 169。 20xx Harcourt, Inc. All rights reserved. ?Preferred dividends are specified by contract, but they may be omitted without placing the firm in default. ?Most preferred stocks prohibit the firm from paying mon dividends when the preferred is in arrears. ?Usually cumulative up to a limit. How does preferred stock differ from mon stock and debt? (More...) 21 3 Copyright 169。 20xx Harcourt, Inc. All rights reserved. Step 2: Find Coupon Payment and Rate N I/YR PV PMT FV 20 12 850 1000 Solve for payment = 100 Therefore, the required coupon rate is $100/$1,000 = 10%. 21 11 Copyright 169。 20xx Harcourt, Inc. All rights reserved. ?Here are the cash flows on a time line: 0 1 4 5 6 19 20 +1,000 100 100 100 100 100 100 1,000 1,100 Input the cash flows into a calculator to find IRR = %. This is the pretax cost of the bond and warrant package. (More...) 21 19 Copyright 169。 20xx Harcourt, Inc. All rights reserved. What conversion price (Pc) is built into the bond? Like with warrants, the conversion price is typically set 20%30% above the stock price on the issue date. $1,000 40 Pc = = = $25. Par value Shares received 21 24 Copyright 169。 20xx Harcourt, Inc. All rights reserved. What is the convertible’s expected cost of capital to the firm? 0 1 2 3 4 5 6 1,000 105 105 105 105 105 105 1, 1, CV6 = 40($20)()6 = $1,. Input the cash flows in the calculator and solve for IRR = %. 21 32 Copyright 169。 20xx Harcourt, Inc. All rights reserved. Warrants Step 1: Find the aftertax cost of the bond with warrants. 0 1 ... 4 5 6 ... 19 20 +1,000 60 60 60 60 60 60 1,000 1,060 INT(1 T) = $100() = $60. Warrants(Opportunity loss per warrant) = 50($) = $. Solve for: kw (AT) = %. 21 40 Copyright 169。 20xx Harcourt, Inc. All rights reserved. ?Company with good future prospects can issue stock “through the back door” by issuing convertible bonds ?Avoids negative signal of issuing stock directly ?Since prospects are good, bonds will likely be converted into equity, which is what the pany wants to issue 。 20xx Harcourt, Inc. All rights reserved. ?The firm’s future needs for equity capital: ?Exercise of warrants brings in new equity capital. ?Convertible conversion brings in no new funds. ?In either case, new lower debt ratio can support more financial leverage. Besides cost, what other factors should be considered? (More...) 21 42 Copyright 169。 20xx Harcourt, Inc. All rights reserved. kd = 12% and kc = %. ks = + g = + = %. Since kc is between kd and ks, the costs are consistent with the risks. ?Check the values: D0(1 + g) P0 $() $20 21 34 Copyright 169。 20xx Harcourt, Inc. All rights reserved. What is (1) the convertible’s straight debt value and (2) the implied value of the convertibi