opportunities to borrow funds to support innovation. The ratio also can influence investors’ dec
opportunities to borrow funds to support innovation. The ratio also can influence investors' decisions regarding the company. Determining an optimal capital structure has been for decades a Holy Grail for practitioners and academics alike. 26. Cattle Company wants to sell some 15 year, annual interest, $1,000 par value bonds. Its stock sells for 514 per share, and each bond would have 70 warrants attached to it, each exercisable into one share of stock ar an exercise price of $51. The firm's straight bonds yield 8.5%. Each warrant is expected to have a market value of $3.00 given that the stock sells for $44. What coupon interest rate must the company set on the bonds in order to sell the bonds with warrants at par? How would you describe the optimal capital structure”? Please be sure to define it and describe what could make it optimal. Succinctness and accuracy both count. Use box on last page Use box on last page Th. Porter & Lopes Inc. just sold a bond with 50 warrants attached. The bonds have a 20year maturity and an annual coupon of 12% and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant! Use box on last page 24. (T/F) Unlike bonds, the cost of preferred stock to the issuing firm is the same on a before tax and after-tax basis. This is because dividends on preferred stock are not tax deductible, whereas interest on bonds is deductible. (T/F) The problem of dilution of stockholders' earnings never results from the sale of call options, but it can arise if warrants are used 2. True; True b. True False 6. False: True d. False: False 24. Hog Wild Bacon Products, Ltd, common stock currently sells for $64, and its 7% convertible debentures ksued at par, or $1.000) well for $910. Each debenture can be converted into 14 shares of common stock at any time in the next 10 years. What is the convention value o Hog's bond! Use box on last page 25. Which of the following statements about convertibles is most CORRECT? a. One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted, b. The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debe c. At the time it is issued, a convertible's conversion (or exercise) price is generally set equal to or below the underlying stock's price d. For equilibrium to exist, the expected retum on a convertible bond must normally be berween the expected return on the firm's otherwise similar straight debt and the expected return on its common stock. 29. (T/F) Networking capital is defined as current assets minus the sum of payables and accruals, and an increase in the current ratio automatically indicates that ret working capital has increased (T/F) An essive current operating asset financine approach will result in permanent current sets and some seasonal current assets being financed using long-term securities a True; True b. True False False, True d. False; False
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