Finance Chapter 19

8/10/2019 Finance Chapter 19

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Chapter 19

Discussion Questions

19-1. What are the basic advantages to the corporation of issuing convertiblesecurities?

The advantages to the corporation of a convertible security are:

a. The interest rate is lower than on a straight issue.b. This type of security may be the only device for allowing a small firm access

to the capital markets.c. The convertible allows the firm to effectively sell stock at a higher price than

that possible when the bond was initially issued but perhaps at a lower pricethan future price potential might provide!.

d. "f the bond can be called at a price above its conversion price# the bond willbe converted to stock and the debt to asset ratio will decline.

19-$. Why are investors willing to pay a premium over the theoretical value pure bondvalue or conversion value!?

"nvestors are willing to pay a premium over the theoretical value for a convertiblebond issue because of the future prospects for the associated common stock.Thus# if there are many years remaining for the conversion privilege# the investorwill be able to receive a reasonably high interest rate and still have the option ofconverting the convertible bond to common stock if circumstances %ustify.

19-&. Why is it said that convertible securities have a floor price?

The floor price of a convertible is based on the pure bond value associated withthe interest payments on the bond as shown in 'igure 19-1. (egardless of howlow the associated common stock might go# the semiannual interest paymentswill set a floor price for the bond.

)19-1


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19-*. The price of +altom ,orporation $/19 convertible bonds is 01#&/. 'or theWilliams ,orporation# the 2 3 $/1 convertible bonds are selling at 04$.

a. 56plain what factors might cause their prices to be different from their parvalue of 01#///.

b. What will happen to each bond7s value if long-term interest rates decline?

,onvertible bond pricing

a. +altom bonds are well above par value because its common stock hasprobably increased substantially. "n the case of Williams# it is reasonable toassume that its common stock has declined. 8lso# its interest rate is probablywell below the going market rate because of its low bond price.

b. With the +altom ,orporation# there would be little or no impact. "t is clearlycontrolled by its common stock value. With the Williams ,orporation# its

potential value is somewhat associated with interest rates rather than %ustconversion!# so it is likely to go up somewhat in value.

19-. +ow can a company force conversion of a convertible bond?

8 firm may force conversion of a bond issue through the use of the call privilege."f a bond has had a substantial gain in value due to an increase in price of theunderlying common stock# the bondholder may prefer to convert to commonstock rather than trade in the bond at some small premium over par as stipulatedin a call agreement.

19-2. What is meant by a step-up in the conversion price?

8 step-up in conversion price will increase with the passage of time andlikewise the conversion ratio will decline. ;efore each step-up# there is aninducement for bondholders to convert to common at the more desirable price.

19-4. 56plain the difference between basic earnings per share and diluted earnings pershare.

;asic earnings per share do not consider the potentially dilutive effects ofconvertibles# warrants# and other securities that can generate new shares ofcommon stock.


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19-. 56plain how convertible bonds and warrants are similar and different.

,onvertible bonds and warrants are similar in that they give the security holder afuture option on the common stock of the corporation. They are dissimilar in thata convertible bond represents a debt obligation of the firm as well. When it is

converted to common stock# corporate debt will actually be reduced and thecapitali=ation of the firm will not increase. 8 warrant is different in that it is not avaluable instrument on its own merits# and also its e6ercise will increase theoverall capitali=ation of the firm.

19-9. 56plain why warrants are issued. Why are they used in corporate finance?!

Warrants may be used to sweeten a debt offering or as part of a merger offer or abankruptcy proceeding. They also offer the potential of future cash flow to thecorporation if the warrants are used to buy new shares of common stock.

19-1/. What are the reasons that warrants often sell above their intrinsic value?

Warrants may sell above their intrinsic value because the investor views theassociated stock7s prospects optimistically. 8lso the longer the time to e6pirationthe higher the speculative premium because the possibility of a rising stock priceincreases. Warrants also allow for the use of leveraged investing.

19-11. What are the differences between a call option and a put option?

8 call option is an option to buy at a set price for a given period of time# and aput option is an option to sell at a set price for a given period of time.

19-1$. )uggest two areas where the use of futures contracts is most common. Whatpercent of the value of the underlying security is typical as a down payment in afutures contract?

'utures contracts are most common for commodities and interest rate securities#especially government bonds.

'ive percent is a typical down payment margin! in a futures contract. Thisallows the holder of the contract to control an amount of securities $/ times morethan the down payment. 'or this reason# futures contracts have very volatileprices.

)19-&


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19-1&. >ou buy a stock option with an e6ercise price of 0/. The cost of the option is0*. "f the stock ends up at 02# indicate whether you have a profit or loss with acall option? With a put option?

With a call option# you would have a profit of 0$. >ou bought the option for 0*

and the market value is 02 over the e6ercise value. With a put option# you wouldhave a loss. "t is worthless to have the right to sell a stock for 0/# when the costof the stock is 02. >ou would lose your 0* investment.

)19-*


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Chapter 19

Problems

1. reston Toy ,o. has warrants outstanding that allow the holder to purchase a share of stockfor 0$$ e6ercise price!. The common stock is currently selling for 0$# while the warrant

is selling for 09.$ per share.

a. What is the intrinsic minimum! value of this warrant?b. What is the speculative premium on this warrant?

19-1. Solution:

Preston Toy Company

a. " @ A B 5! C DWhere: " @ "ntrinsic value of a warrant

A @ Aarket value of common stock5 @ 56ercise price of a warrant

D @ Dumber of shares each warrant entitles the holder to purchase

" @ 0$ B 0$$! C 1 @ 02

b. ) @ W B "Where: ) @ )peculative premium

W @ Warrant price" @ "ntrinsic value

) @ 09.$ B 02.// @ 0&.$

)19-


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$. Euantum# "nc. has warrants outstanding that allow the holder to purchase 1. shares ofstock per warrant at 0&/ per share e6ercise price!. Thus# each individual share can bepurchased at 0&/ with the warrant. The common stock is currently selling for 0&2.The warrant is selling for 01$.

a. What is the intrinsic minimum! value of this warrant?

b. What is the speculative premium on this warrant?c. What should happen to the speculative premium as the e6piration date approaches?

19-2. Solution:

Quantum, Inc.

a. " @ A B 5! C D

Where " @ "ntrinsic value of a warrantA @ Aarket value of common stock5 @ 56ercise price of a warrant

D @ Dumber of shares each warrant entitles the holder to purchase

" @ 0&2 B 0&/! C 1. @ 09.//

b. ) @ W B "Where ) @ )peculative premium

W @ Warrant price" @ "ntrinsic value) @ 01$ B 09 @ 0&.//

c. The speculative premium should decrease and approach 0/as the e6piration date nears.

)19-2


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&. The warrants of "ntegra Fife )ciences allow the holder to buy a share of stock at 011.4 andare selling for 0$.. The stock price is currently 0./. To what price must the stock go forthe warrant purchaser to at least be assured of breaking even?

19-. Solution:Inte!ra "i#e Sciences

The stock price must go to 01*.2/. 8t that point# the warrantwill be worth at least 0$. 01*.2/ B 011.4! that eGuals thecost of the warrant.

011.4 e6ercise priceH $. speculative premium01*.2/ breakeven price

*. The warrants of Aicrosystems ,orporation allow the holder to buy a share of stock at01./ and are selling for 0*./. The stock price is currently 01&.4/. To what price mustthe stock go for the warrant purchaser to at least be assured of breaking even?

19-$. Solution:

%icrosystems Corporation

The stock price must go to 0$/.&/. 8t that point# the warrantwill be worth at least the current price of 0*./.

" @ A B 5! C DWhere: " @ "ntrinsic value of a warrant

A @ Aarket value of common stock5 @ 56ercise price of a warrant

D @ Dumber of shares each warrant entitles the

holder to purchase

" @ 0$/.&/ B 01./! C 1 @ 0*./

)19-4


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. lunkett Iym 5Guipment# "nc.# has a 01#/// par value convertible bond outstanding thatcan be converted into $ shares of common stock. The common stock is currently sellingfor 0&*.4 a share# and the convertible bond is selling for 092/.

a. What is the conversion value of the bond?b. What is the conversion premium?

c. What is the conversion price?

19-&. Solution:

Plun'ett (ym )*uipment, Inc.

a. 0&*.4 stock price C $ shares @ 02.4

b. 092/ bond price B 02.4 conversion value @ 091.$

conversion premium

c. 01#///J$ conversion ratio @ 0*/ conversion price

8ssume all bonds in the following problems have a par value of 01#///.!

2. The bonds of Ioldman )ack ,o. have a conversion premium of 0. Their conversionprice is 0*/. The common stock price is 0*$. What is the price of the convertible bonds?

19-+. Solution:

(olman Sac' Company

'irst compute the conversion ratio

The conversion ratio is eGual to the par value divided by theconversion price:

ar KalueJ,onversion rice @ ,onversion (atio 01#///J0*/ @ $ conversion ratio

)19-


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19-+. Continue

Aultiply the common stock price times the conversion ratio toget the conversion value:

,ommon )tock rice C ,onversion (atio @ ,onversion Kalue:0*$ C $ shares @ 01#// conversion value

8dd the conversion premium to the conversion value to arrive atthe convertible bond price:

,onversion Kalue H ,onversion remium @ ,onvertible

;ond rice01#// H 0 @ 01#1/ ,onvertible ;ond rice

4. The bonds of Ioniff ;ank L Trust have a conversion premium of 09/. Their conversionprice is 0$/. The common stock price is 012./. What is the price of the convertible bonds?

19-/. Solution:

(oni## 0an' an Trust

The conversion ratio is eGual to the par value divided by theconversion price:

ar valueJconversion price @ conversion ratio01#///J0$/ @ / conversion ratio

,ommon stock price C conversion ratio @ conversion value012./ C / shares @ 0$ conversion value

,onversion Kalue H ,onversion remium@ ,onvertible ;ond rice0$ H 09/ @ 091

)19-9


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. "owa Aeat ackers# "nc.# has a convertible bond Guoted on the D>)5 bond market at .;ond Guotes represent percentage of par value. Thus 4/ represents 04//# / represents0//# and so on.! The bond matures in 1 years and carries a coupon rate of 2M percent.The conversion price is 0$/# and the common stock is currently selling for 01$ per shareon the D>)5.

a. ,ompute the conversion premium.b. 8t what price does the common stock need to sell for the conversion value to be eGual

to the current bond price?

19-. Solution:

Ioa %eat Pac'ers

a. 01#/// par valueJ0$/ conversion price @ / sharesconversion ratio

01$ common stock price C / shares @ 02//conversion value

0/ bond price B 02// conversion value @ 0$/conversion premium

b. 0/ bond priceJ/ shares @ 014

)19-1/


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9. (eynolds Technology has a convertible bond outstanding# trading in the marketplace at0&. The par value is 01#///# the coupon rate is 9 percent# and the bond matures in$ years. The conversion ratio is $/# and the company7s common stock is selling for0*1 per share. "nterest is paid semiannually.

a. What is the conversion value?

b. "f similar bonds# which are not convertible# are currently yielding 1$ percent# what isthe pure bond value of this convertible bond? Nse semiannual analysis as describedin ,hapter 1/.!

19-9. Solution:

3eynols Technolo!y

a. 0*1.// stock price C $/ shares @ 0$/ conversion value

b. ure ;ond Kalue where n @ /# i @ 2Oure ;ond Kalue 0* semiannually C 1.42$ @ 04/9.$901#/// principal value C ./* @ *.//

042&.$9

1/. "n problem 9# if the interest rate on similar bonds# which are not convertible# goes up from1$ percent to 1* percent# what will be the new pure bond value of the (eynolds bonds?8ssume the (eynolds bonds have the same coupon rate of 9 percent as described inproblem 9# and that $ years remain to maturity. Nse semiannual analysis.

19-14.Solution:

3eynols Technolo!y Continue

ure ;ond Kalue where n @ /# i @ 4Oure ;ond Kalue 0* semiannually C 1&./1 @ 02$1./*01#/// principal value C ./&* @ &*.//

02./*

)19-11


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11. Western ipeline# "nc.# has been very successful in the last five years. "ts 01#/// par valueconvertible bonds have a conversion ratio of $. The bonds have a Guoted interest rate of percent a year. The firm7s common stock is currently selling for 0*&./ per share.The current bond price has a conversion premium of 01/ over the conversion value.

a. What is the current price of the bond?

b. What is the current yield on the bond annual interest divided by the bond7smarket price!?

c. "f the common stock price goes down to 0$$./ and the conversion premium goesup to 01//# what will be the new current yield on the bond?

19-11. Solution:

5estern Pipeline, Inc.

a. 0*&./ stock price C $ shares @ 01#$1 ,onversion Kalue

,onversion 1/ remium

01#$$ ;ond rice

b. O C 01#/// @ 0/ 8nnual interest

8nnual interest 0/*./4O

;ond price 01# $$= =

c. 0$$./ stock price C $ shares @ 02&/ ,onversion Kalue H1// ,onversion remium 04&/ ;ond rice

8nnual interest 0/2.O

;ond price 04&/= =

1$. 5astern


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d.


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19-12. Continue

e. Aost likely# the price of the bond will be influenced by thefloor price and changing interest rates. The stock priceneeds to rise from 01.$ per share closer to 0$$.091*.12J*/! before the bond price will react directly tostock price changes.

1&.


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1*. Faser 5lectronics ,ompany has 0&/ million in percent convertible bonds outstanding.The conversion ratio is /Q the stock price is 014Q and the bond matures in 1 years. Thebonds are currently selling at a conversion premium of 02/ over their conversion value.

"f the price of the common stock rises to 0$& on this date ne6t year# what would yourrate of return be if you bought a convertible bond today and sold it in one year? 8ssume on

this date ne6t year# the conversion premium has shrunk from 02/ to 01/.

19-1$.Solution:

"aser )lectronics Company

'irst find the price of the convertible bond. The conversionvalue is 0/ 014 C /!. The value# 0/# plus the

premium# 02/# eGuals 091/# the current market price of the

convertible bond.

De6t# you find the price of the convertible bond on this dayne6t year.

0$& stock price C / conversion ratio @ 01#1/ conversionvalue

01#1/ conversion value H 01/ premium @ 01#12/ market

value of the convertible bond.

Then determine the rate of return.01#12/ B 091/!J091/ @ 0$/J091/ @ $4.*4O

)19-1


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1. 8ssume you can buy a warrant for 0 that gives you the option to buy one share ofcommon stock at 01* per share. The stock is currently selling at 012 per share.

a. What is the intrinsic value of the warrant?b. What is the speculative premium on the warrant?c. "f the stock rises to 0$* per share and the warrant sells at its theoretical value without a

premium# what will be the percentage increase in the stock price and the warrant priceif you bought the stock and the warrant at the prices stated above? 56plain thisrelationship.

19-1&.Solution:

a. 012 stock price B 01* e6ercise price! C 1 share perwarrant @ 0$ intrinsic value

b. 0 warrant price B 0$ intrinsic value @ 0& speculativepremium

c. ercentage change if stock is purchased at 012

0$* 0121// /O

012

=

ercentage change if warrant is purchased at 0

Dew intrinsic value @ 0$* B 01*! C 1 @ 01/

01/ 01//O

0

=

The warrant is leveraged. 8 movement in the stock pricewill cause the warrant to rise on a smaller initial investment

and# therefore# the percentage gain is larger for the warrantthan for the stock.

)19-12


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12. The (edford "nvestment ,ompany bought 1// ,inema ,orp. warrants one year ago andwould like to e6ercise them today. The warrants were purchased at 0$* each# and theye6pire when trading ends today assume there is no speculative premium left!. ,inema,orp. common stock is selling today for 0/ per share. The e6ercise price is 0&/ and eachwarrant entitles the holder to purchase two shares of stock# each at the e6ercise price.

a. "f the warrants are e6ercised today# what would the (edford "nvestment ,ompany7sdollar profit or loss be?

b. What is the (edford "nvestment ,ompany7s percentage rate of return?

19-1+.Solution:

The 3e#or In6estment Company

a. "ntrinsic value of a warrant @ Aarket value of commonstock B 56ercise price of warrant! C Do. of shares eachwarrant entitles holder to purchase.

0/ B 0&/! C $ @ 0*/ intrinsic value0*/ C 1// warrants @ 0*#/// proceeds from sale0$* C 1// warrants @ 0$#*// purchase price

rofit @ roceeds from sale B urchase price@ 0*#/// B 0$#*//

@ 01#2//

b. 01#2//J0$#*// @ 22.4O return

)19-14


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14. 8ssume in problem 12 that ,inema ,orp. common stock was selling for 0*/ per sharewhen the (edford "nvestment ,ompany bought the warrants.

a. What was the intrinsic value of a warrant at that time?b. What was the speculative premium per warrant when the warrants were purchased?c. What would the (edford "nvestment ,ompany7s total dollar profit or loss have been

had it invested the 0$#*// directly in ,inema ,orp.7s common stock one year ago at0*/ per share and sold it today at 0/ per share?

d. What would the percentage rate of return be on this common stock investment?,ompare this to the rate of return on the warrant investment computed in problem 12b.

19-1/.Solution:

The 3e#or In6estment Company Continue

a. 0*/ stock price B 0&/ e6ercise price! C $ shares @ 0$/

intrinsic value

b. 0$* purchase price B 0$/ intrinsic value @ 0* speculativepremium per warrant

c. 0$#*// investmentJ0*/ per share @ 2/ shares2/ shares C 0/ B 0*/! @ 02//

d. 02//J0$#*// @ $O return. This is clearly less than the22.4O return on the warrant.

1. Fi= Todd has 01#$// to invest in the market. )he is considering buying * shares of the5agle ,orporation at 0$ per share. +er broker suggests she may wish to considerpurchasing warrants instead. The warrants are selling for 02# and each warrant allows her topurchase one share of 5agle ,orporation common stock at 0$& per share.

a. +ow many warrants can Fi= purchase for the same 01#$//?b. "f the price of the stock goes to 0 what would be her total dollar and percentage

return on the stock?

c. 8t the time the stock goes to 0 the speculative premium on the warrant goes to =erothough the intrinsic value of the warrant goes up!. What would be Fi=7s total dollar andpercentage return on the warrant?

d. 8ssuming that the speculative premium remains 0* over the intrinsic value# how farwould the price of the stock have to fall before the warrant has no value?

)19-1


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19-1.Solution:

"i7 To

a. 01#$// $// warrants02

=

b. 0 & new priceB $ old price0 1/ gainC * shares0*/ total dollar gain

01/ 0*/*/O or */O

0$- 01#$//= =

c. 0 & stock priceB $& option price0 1$ intrinsic value / speculative premium!

0 1$ new price of warrant

B 2 old price of warrant0 2 gainC $// warrants01#$// total dollar gain

02 01#$//1//OQ 1//O

02 01#$//= =

d. With a 0$& option price# at a stock price of 019# the warrantwould have a negative intrinsic value of 0*. With aspeculative premium of only 0*# the warrant would beworthless. Nnder the problem as described# the warrantwould be worthless at stock values of 019 or less.

)19-19


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19. +ughes Technology has had net income of 0*/#/// in the current fiscal year. There are1//#/// shares of common stock outstanding along with convertible bonds# which have atotal face value of 01.$ million. The 01.$ million is represented by 1#$// different 01#///bonds. 5ach 01#/// bond pays 2 percent interest. The conversion ratio is $/. The firm is ina &/ percent ta6 bracket.

a. ,alculate +ughes7s basic earnings per share.b. ,alculate +ughes7s diluted earnings per share.

19-19.Solution:

8u!hes Technolo!y

a. ;asic earnings per share

5arnings 0*-/#///0*.-/)hares 1//#///= = =

b.


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$/. Aeyers ;usiness )ystems has $ million shares of stock outstanding. 5arnings with warrantsafter ta6es are 0* million. Aeyers also has warrants outstanding# which allow the holder tobuy 1//#/// shares of stock at 01/ per share. The stock is currently selling for 0*/ pershare.

a. ,ompute basic earnings per share.

b. ,ompute diluted earnings per share considering the possible impact of the warrants.Nse the formula:

5arnings after ta6es

)hares outstanding H 8ssumed net increase in shares from the warrants

19-24.Solution:

%eyers 0usiness Systems

a. ;asic earnings per share

5arnings 0*#///#///0$.//

)hares $#///#///= = =

b.


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,ash proceeds 1//#/// 01/ @ 01#///#///,urrent price of stock 0*/

8ssumed reduction in shares outstanding from cash

roceeds @ 01#///#///J0*/ @ $#///&. 8ssumed net increase in shares from e6ercise UUUUUU

of warrants 4#///

$1. Tulsa


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19-21.Solution:

Tulsa Drillin! Company

a. 'irst find the price of the convertible bond. The conversion

value is 01#$/ 0&$ C */!. The conversion value# 01#$/#plus the 04/ premium# eGuals 01#&/# the current marketprice of the convertible bond.

De6t# you find the price of the convertible bond on this dayne6t year.

0*$ stock price C */ conversion ratio @ 01#2/ conversionvalue

01#2/ conversion value H 0$/ premium @ 01#4// marketprice of the convertible bond

De6t# calculate the rate of return.01#4// B 01#&/!J01#&/ @ 0&/J01#&/ @ $.9&O annualreturn.

b. ure bond value after one year nine years remaining!.n @ 1 and i @ *O

0 semiannually C 1$.29 K"'8! @ 0 292.$*01#/// principal value C .*9* K"'! @ *9*.//

01#19/.$*

;ecause the pure bond value of 01#19/.$* is still well below

the conversion value of 01#2/ and the market value of01#4//# it would not have a significant effect on valuation.

)19-$&


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C%P3)8)SI;) P30")%

Comprehensi6e Problem 1.

The 'urgeson ,orporation has 1#/// convertible bonds 01#/// par value! outstanding# each of

which may be converted to / shares 0$/ conversion price!. The 01 million worth of bonds has1 years to maturity. The current price of the company7s stock is 0$ per share. 'urgeson7s netincome in the most recent fiscal year was 0&//#///. The bonds pay 1$ percent interest.The corporation has 1/#/// shares of common stock outstanding. ,urrent market rates onlong-term bonds of eGual Guality are 1* percent. 8 &/ percent ta6 rate is assumed.

a. ,ompute diluted earnings per share.b. 8ssume the bonds currently sell at a percent conversion premium over straight conversion

value based on a stock price of 0$!. +owever# as the price of the stock increases from 0$to 0& due to new events# there will be an increase in the bond price# but a =ero conversionpremium. Nnder these circumstances# determine the rate of return on a convertible bondinvestment after this price change# based on the appreciation in value.

c. Dow assume the stock price is 01 per share because a competitor introduced a newproduct. Would the straight conversion value be greater than the pure bond value# basedon the interest rates stated above? )ee Table 12B& in ,hapter 12 to get the bond valuewithout having to go through the actual computation.!

d. "n the case of part c# if the convertible traded at a $/ percent premium over the straightconversion value# would the convertible be priced above the pure bond value?

e. "f long-term interest rates in the market go down to 1/ percent# while the stock price isat 0$2# with a * percent conversion premium# what would the difference be between themarket price of the convertible bond and the pure bond value? 8ssume 1 years tomaturity# and once again use Table 12B& for part of your answer.

f. "f 'urgeson were able to retire the convertibles and replace them with */#/// shares of

common stock selling at 0$ per share and paying a 2. percent dividend yielddividend-to-price ratio!# would the afterta6 cash outflow related to the convertible begreater or less than the cash outflow related to the stock?

)19-$*


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CP19-1. Solution:

3ate o# 3eturn on Con6ertible 0on In6estments


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CP 19-1. Continue

d. ,onversion value C premium04/.// C 1.$/ @ 09//.//

The convertible would be trading for greater than the purebond value: 09// V 04.*!.

e. ,onversion value @ / C 0$2 @ 01#&//.//remium *O! 1./*,urrent value 01#&$.//ure bond value 1/O market value! @ 1#1&.&$


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does not consider the total return reGuirement on thestock dividends H growth!.

)19-$4


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Comprehensi6e Problem 2.

".A. )tern# "nc.# "A)! has 0&/ million of convertible bonds outstanding &/#/// bonds at 01#/// parvalue! with a coupon rate of 1/ percent. "nterest rates are currently percent for bonds of eGual risk.The bonds have $ years left to maturity. The bonds may be called at a 1/ percent premium over par

as well as converted into $ shares of common stock. The ta6 rate for the company is */ percent.The firm7s common stock is currently selling for 0* per share# and it pays a dividend of 0*.The e6pected income for the company is 0*$ million with million shares of common stockcurrently outstanding.

Thoroughly analy=e these bonds and determine whether "A) should call the bonds at the1/ percent call premium. "n your analysis# consider the following:

a. The impact of the call on basic and diluted earnings per share assume the call forcesconversion!.

b. The conseGuences of your decision on financing fle6ibility.c. The net change in cash outflows to the company as a result of the call and conversion.

CP19-2. Solution:

= Call Decision 5ith Con6ertible 0ons

I. %. Stern, Inc.

"nterest e6pense 1/O C 0&/ million @ 0///#///

)hares created from conversion @ $ C &/#/// bonds@ 4/#///

,onversion value @ $ shares C 0* per share @ 01#$//

,all price @ 01#/// C 1.1/ @ 01#1//

a. "f the bond is called# it will be converted since theconversion value is greater than the call price.

;asic 5) before conversion

@ Det incomeJshares outstanding@ 0*$ millionJ million shares@ 0.*/

)19-$


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CP 19-2. Continue

;asic 5) after conversion

8d%usted earnings after ta6es)hares outstanding Dew )hares issued

=

+

0*$#///#/// H 0///#/// 1 .*!

#///#/// H 4/#///

=

0*$#///#/// H 01#//#/// 0*//#///04.2$

-#4-/#/// -#4-/#///

= = =

There is a reduction in basic 5).

Finance Chapter 19

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Transcript of Finance Chapter 19