Piglet Pies has issued a zero-coupon 10-year

Piglet Pies has issued a zero-coupon 10-year bond that can be converted into 10 Piglet shares. Comparable straight bonds are yielding 8%. Piglet stock is priced at $50 a share.

a.Suppose that you had to make a now-or-never decision on whether to convert or to stay with the bond. Which would you do?

b.If the convertible bond is priced at $550, how much are investors paying for the option to buy Piglet shares?

c.If after one year the value of the conversion option is unchanged, what is the value of the convertible bond?

Proctor Power has fixed assets worth $200 million and net working capital worth $100 million. It is financed partly by equity and partly by three issues of debt. These consist of $250 million of First Mortgage Bonds secured only on the company’s fixed assets, $100 million of senior debentures, and $120 million of subordinated debentures. If the debt were due today, how much would each debtholder be entitled to receive?

You need to choose between making a public offering and arranging a private placement. In each case the issue involves $10 million face value of 10-year debt. You have the following data for each:

A public issue: The interest rate on the debt would be 8.5%, and the debt would be issued at face value. The underwriting spread would be 1.5%, and other expenses would be $80,000.

A private placement: The interest rate on the private placement would be 9%, but the total issuing expenses would be only $30,000.

• What is the difference in the proceeds to the company net of expenses?
  • Other things being equal, which is the better deal?
  • What other factors beyond the interest rate and issue costs would you wish to consider before deciding between the two offers?

In 2010 the Pandora Box Company made a rights issue at €5 a ahsre of one new share for every four shared held. Before the issue there were 10 million shares outstanding and the share price was €6.

• What was the total amount of the new money raised?
• What was the value of the right to buy one new share
• What was the prospective stock prices after the issue?
• How far could the total value of the company fall before shareholders would be unwilling to take up their rights?