Table 1: Balance Sheet for Year Ended December 31, 1992

Assets
Cash
Accounts receivable
Materials and supplies
Total current assets
Plant an equipment (net)
Total assets

$
$
$
$
$
$

5,600,000.00
17,840,000.00
36,680,000.00
60,120,000.00
433,432,000.00
493,552,000.00

$
$
$
$
$
$
$
$
$
$

11,600,000.00
7,664,000.00
40,000,000.00
59,264,000.00
220,000,000.00
279,264,000.00
68,784,000.00
145,504,000.00
214,288,000.00
493,552,000.00

Claims on Assets
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained earnings
Total common equity
Total claims on assets

Tabe 2: Assumed Relationships Between Leverage and the Cost of Capital

Leverage (LT debt/ratio)
0%
10%
20%
30%
40%
50%
60%
70%

ST interest rate
7.50%
7.70%
7.90%
8.10%
8.30%
8.50%
9.50%
12.00%

Question 1
1 a)

Notes payable
Long-term debt
Equity

$
40,000,000.00
$ 220,000,000.00
$
68,784,000.00

12.17%
66.91%
20.92%

Total

$ 328,784,000.00

1b)
WACC = w(dST)k(dST)(1-T)+w(dLT)k(dLT)+w(s)k(s) =

8.46%

Question 2
Tavle 3: Conversion and Bond Values for 11% Convertible Bonds
Year

Straight Conversion Value

0 $
698
5 $
891
10 $
1,137
15 $
1,451
20 $
1,852
25 $
2,364

Bond Value
$
$
$
$
$
$

922
925
932
943
964
1,000

Call Price
$
$
$
$
$
$

1,110
1,096
1,072
1,048
1,024
1,000

Graph
2500

2000

1500

1000

500

Question 4

Year

Straight Conversion Value

0
1
2
3
4

$698
$733
$770
$808
$848

9 10 11 12 13 14 15 16 17 18 19 20 21 22

Bond Value
$922
$922
$923
$924
$924

5
6
7
8
9
10
11
12
13
14

$891
$935
$982
$1,031
$1,083
$1,137
$1,194
$1,254
$1,316
$1,382

$925
$926
$928
$929
$930
$932
$934
$936
$938
$941

15

$1,451

$943

16
17
18
19
20
21
22
23
24
25

$1,524
$1,600
$1,680
$1,764
$1,852
$1,945
$2,042
$2,144
$2,251
$2,364

$947
$950
$954
$959
$964
$970
$976
$983
$991
$1,000

Question 5
$1000 = _ ((110*0,6)/(1+kc)^t) + ((17,45*1,05^15*40)/((1+kc)^15)
kc = 8,23%

Question 6
sane calculations but without tax
before tax rate of return = 12,19%

12.19%

Question 7
Notes payable
Long-term debt
Equity
Convertible bonds
Total
WACC =

$
$
$
$
$

40,000,000
195,600,379
157,050,000
60,000,000
452,650,379

9.85%

Question 8
$1,282.00 Difference
$1,137.00 Loss

$145.00
$1,450.00

Question 9
Year
0
1
2
3
4
5
6
7
8
9
10
11
12

1000
60
60
60
60
60
60
60
60
60
60
60
60

53.5714285714
47.8316326531
42.7068148688
38.1310847043
34.0456113431
30.3978672706
27.1409529202
24.2329936788
21.6366014989
19.3183941954
17.2485662459
15.4005055767

13
14
15
16
17
18
19
20
21
22
23
24
25

60
60
60
60
60
60
60
60
60
60
60
60
1060

V(w)=

13.7504514078
12.277188757
10.9617756759
9.7872997106
8.7386604559
7.802375407
6.9664066134
6.2200059048
5.5535767008
4.9585506257
4.4272773443
3.9529262003
62.3527049454
529.4116532761
$ 1000 - 529,41 =
470,59/80 =

17,45* (1,05)^6
23,38-20=
3,38*80=

470.5883467239
5.882354334

23.3846689289
3.3846689289
270.7735143125

Question 12
Par value
Coupon rate
Maturity (years)
Premium in year 2
yearly drop in call premium
CR
Growth until conversion

Year
0
5
10
15
20
25

1000
10.5%
25
105
4.57
40
2.51%

Straight Conversion Value

$
698
$
891
$
1,137
$
1,451
$
1,852
$
2,364

Bond Value
$
$
$
$
$
$

882
888
898
915
946
1,000

Call Price
$
$
$
$
$
$

Year
0
1
2
3
4
5

-1000
63
63
63
63
63

kc

1,105
1,091
1,068
1,046
1,023
1,000

6
7
8
9
10
11
12
13
14
15
WACC =

63
63
63
63
63
63
63
63
63
1514.0918692295
9.81%

LT interest rate
9.50%
9.75%
10.00%
10.20%
10.40%
10.50%
12.50%
15.00%

Cost of Retained Earnings

12.50%
12.60%
13.00%
13.40%
14.20%
16.10%
18.50%
21.60%

Use Alternative 2 (on page 2)

Maturity Value
$
1,000
$
1,000
$
1,000
$
1,000
$
1,000
$
1,000

Estimated Market Value

###
$
1,132
$
1,282
$
1,451
$
1,852
$
2,364

Straight Conversion Value

Bond Value
Call Price
Maturity Value
Market Value

17 18 19 20 21 22 23 24 25 26

par value*1,4
1290.1960524311
1291.0195787228
1291.9419281696
1292.9749595499
1294.1319546959

1295.4277892594
1296.8791239706
1298.504618847
1300.3251731087
1302.3641938817
1304.6478971475
1307.2056448052
1310.0703221818
1313.2787608436
1316.8722121449
1320.8968776023
1325.4045029145
1330.4530432643
1336.107408456
1342.4402974707
1349.5331331672
1357.4771091472
1366.3743622449
1376.3392857143
1387.5
1400

Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

$ -1,000.00
$
66.00
$
66.00
$
66.00
$
66.00
$
66.00
$
66.00
$
66.00
$
66.00
$
66.00
$
66.00
$
66.00
$
66.00
$
66.00
$
66.00
$ 1,517.09

Year
0
1
2
3

-1000
110
110
110

4
5
6
7
8
9
10
11
12
13
14
15

110
110
110
110
110
110
110
110
110
110
110
1561.091869

9%
43%
35%
13%

Investor will make a loss=$1450

Ab dem jahr wo call protection nicht mehr da ist muss conversion so hoch sein wie market, sonst loss

CF stream
-1000
60
60
60
60
60
330.773514
60
60
60
60
60
60

60
60
60
60
60
60
60
60
60
60
60
60
1060
7.58% after tax cost to the companyof the bonds with warrants

per warrant

Maturity Value
$
1,000
$
1,000
$
1,000
$
1,000
$
1,000
$
1,000

Estimated Market Value

###
$
1,132
$
1,282
$
1,451
$
1,852
$
2,364
Year

7.97%

0
1
2
3
4
5

-1000
105
105
105
105
105

6
7
8
9
10
11
12
13
14
15

105
105
105
105
105
105
105
105
105
1556.091869

Cost of New Common Stock

13.30%
13.40%
13.80%
14.30%
15.25%
17.30%
20.30%
23.40%

<- Target

hoch sein wie market, sonst loss und nicht zustimmen zu kaufen

bonds with warrants

return =

11.74%

Table 1: Balance Sheet for Year Ended December 31, 1992

Assets
Cash
Accounts receivable
Materials and supplies
Total current assets
Plant an equipment (net)
Total assets

$
5,600,000.00
$ 17,840,000.00
$ 36,680,000.00
$ 60,120,000.00
$ 433,432,000.00
$ 493,552,000.00

Claims on Assets
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained earnings
Total common equity
Total claims on assets

$
$
$
$
$
$
$
$
$
$

11,600,000.00
7,664,000.00
40,000,000.00
59,264,000.00
220,000,000.00
279,264,000.00
68,784,000.00
145,504,000.00
214,288,000.00
493,552,000.00

Tabe 2: Assumed Relationships Between Leverage and the Cost of Capital

Leverage (LT debt/ratio)
0%
10%
20%
30%
40%
50%
60%
70%

ST interest rate
7.50%
7.70%
7.90%
8.10%
8.30%
8.50%
9.50%
12.00%

Question 1
1 a)
Current Market Value Capital Structure
DEBT
Notes payable
Interest cost
LT bonds otsatnding

40,000,000.00
8.50%
220,000.00

Par value
Coupon rate
Current interest rate
Years to maturity
Notes payable
Long-term debt
Debt Market Value

Notes payable
Long-term debt
Equity
Total

1,000.00
9.00%
10.50%
15
$ 40,000,000.00
$ 195,600,378.84
$ 235,600,378.84

$
40,000,000.00
$ 195,600,378.84
$ 157,050,000.00
$ 392,650,378.84

10.19%
49.82%
40.00%

1b)
WACC = w(dST)k(dST)(1-T)+w(dLT)k(dLT)+w(s)k(s) =

10.58%

LT interest rate
9.50%
9.75%
10.00%
10.20%
10.40%
10.50%
12.50%
15.00%

Cost of Retained Earnings

12.50%
12.60%
13.00%
13.40%
14.20%
16.10%
18.50%
21.60%

EQUITY

Current share price

shares outstanding
Equity Market Value

Cost of New Common Stock

13.30%
13.40%
13.80%
14.30%
15.25%
17.30%
20.30%
23.40%

17.45
9,000,000.00
$ 157,050,000.00

<- Target