A bond with 10 detachable warrants has just been offered for sale at $1,000. The bond matures in 12 years and has an annual coupon of $80

A $1,000 convertible debenture has a conversion price for common stock of $85 per share. The common stock is selling at $92 a share. What is the conversion value of this bond?    A.  $920.00 B.  $923.91 C.  $1,000.00 D.  $1,082.35 E.  $1,092.00 Conversion value = ($1,000/$85)($92) = $1,082.35

98.

A bond with 10 detachable warrants has just been offered for sale at $1,000. The bond matures in 12 years and has an annual coupon of $80. Each warrant gives the owner the right to purchase two shares of stock in the company at $14 per share. Ordinary bonds (with no warrants) of similar quality are priced to yield 11 percent. What is the value of one warrant?    A.  $7.00 B.  $13.58 C.  $14.00 D.  $16.67 E.  $19.48   Total warrant value = $1,000 - $805.23 = $194.77 Price per warrant = $194.77/10 = $19.48

99.

Your company is deciding when to invest in a new machine. The new machine will increase cash flow by $240,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,200,000. The cost of the machine will decline by $120,000 per year until it reaches $720,000, where it will remain. Your required return is 8 percent. In which year should you purchase the machine?    A.  Year 0 B.  Year 1 C.  Year 2 D.  Year 3 E.  Year 4   The company should purchase the machine today when the NPV is the highest.

100.

We are examining a new project. We expect to sell 9,500 units per year at $48 net cash flow apiece for the next 20 years. In other words, the annual operating cash flow is projected to be $45 × 9,000 = $405,000. The relevant discount rate is 14 percent, and the initial investment required is $1,730,000. After the first year, the project can be dismantled and sold for $1,350,000. If expected sales are revised based on the first year's performance, it would make sense to abandon the investment if the sales are less than which of the following number of units?    A.  4,294 units B.  4,620 units C.  4,750 units D.  4,810 units E.  5,020 units $1,350,000 = ($48)(Q)(PVIFA14%, 19); Q = 4,294 units Abandon the project if Q < 4,294 units because the NPV of abandoning the project is greater than the NPV of the future cash flows.