Posted: July 25th, 2022

- A firm has the following preferred stocks outstanding:

- PFD A: $40 annual dividend; $1,000 par value; no maturity
- PFD B: $95 annual dividend; $1,000 par value; maturity after twenty-five years

If comparable yields are 9 percent, what should be the price of each preferred stock?

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2. Given the information below, answer the following questions.

A convertible bond has the following features:

Principal |
$1,000 |

Maturity date |
20 years |

Interest |
$80 (8% coupon) paid yearly |

Call price |
$1,050 |

Exercise price |
$65 a share |

a. The bond may be converted into how many shares?

b. If comparable non-convertible debt offered an annual yield of 12 percent, what would be the value of this bond as debt?

c. If the stock were selling for $52, what is the value of the bond in terms of stock?

d. Would you expect the bond to sell for its value as debt (i.e., the value determined in b) if the price of the stock were $52?

e. If the price of the bond were $960, what are the premiums paid over the bond’s value as stock and its value as debt?

f. If the price of the stock were $35, what would be the minimum price of the bond?

g. What is the probability that the bond will be called when the price of the stock is $52?

h. If the price of the stock rose to $73, what would happen to the price of the bond?

i. If the price of the stock were $73, what would the investor receive if the bond were called?

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