Maurice Tutor

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Category > Management Posted 06 Apr 2018 My Price 9.00

Ytel common equity

  1. Rich McDonald, CFA, is evaluating his investment alternatives in Ytel Incorporated by analyzing a Ytel convertible bond and Ytel common equity. Characteristics of the two securities are given in the following exhibit: (LO 15-3)

Characteristics

Convertible Bond

Common Equity

Par value

$1,000

—

Coupon (annual payment)

4%

—

Current market price

$980

$35 per share

Straight bond value

$925

—

Conversion ratio

25

—

Conversion option

At any time

—

Dividend

—

$0

Expected market price in 1 year

$1,125

$45 per share

    1. Calculate, based on the exhibit, the

      1. Current market conversion price for the Ytel convertible bond.

      2. Expected one-year rate of return for the Ytel convertible bond.

      3. Expected one-year rate of return for the Ytel common equity.

One year has passed and Ytel’s common equity price has increased to $51 per share. Also, over the year, the yield to maturity on Ytel’s nonconvertible bonds of the same maturity increased, while credit spreads remained unchanged.

    1. Name the two components of the convertible bond’s value. Indicate whether the value

of each component should decrease, stay the same, or increase in response to the:

      1. Increase in Ytel’s common equity price.

      2. Increase in bond yield.

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Answers

Maurice Tutor
(5)
Status NEW Posted 06 Apr 2018 06:04 PM My Price 9.00

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