Patience is reviewing a project with projected sales of 4,200 units a year, a cash flow of $28 a unit, and a four-year project life. Assume all operating cash flows occur on the last day of each year. The initial cost of the project is $247,000. The relevant discount rate is 13 percent. Patience has the option to abandon the project after two years at which time she feels she could sell the project's assets for $110,000. At what level of annual sales, starting in year 3, should she be willing to abandon this project?
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86.
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You own a convertible bond with a face value of $1,000 and a market value of $1,034. The bond can be converted into 16 shares of stock. What is the conversion price?
Conversion price = $1,000/16 = $62.50
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87.
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You own nine convertible bonds. These bonds have a 7 percent coupon, a $1,000 face value, and mature in 6 years. The bonds are convertible into shares of common stock at a conversion price of $25. How many shares of stock will you receive if you convert all of your bonds?
Number of shares = ($1,000/$25) × 9 = 360 shares
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88.
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A convertible bond has a face value of $5,000 and a conversion price of $80. The bond has a 6 percent coupon, pays interest semi-annually, and matures in 12 years. Similar bonds are yielding 7.5 percent. The current price of the stock is $42 per share. What is the conversion value of this bond?
Conversion value = ($5,000/$80) × $42 = $2,625
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