Assume a firm has three claims outstanding: equity, ordinary (zero coupon) bonds, and subordinated convertible (zero...

Assume a firm has three claims outstanding: equity, ordinary (zero coupon) bonds, and subordinated convertible (zero coupon) bonds. What factors should be important in valuing these claims and how do they affect these values?

Expert Solution

Factors that could affect these claims are as follows and also how it will afftect the values:

1. Interest rate : Interest rate will imapct the zero coupon bond, for the valuaiton of zero coupon bond change in interest rate will lead to change in price of bond. Bond price is inversely proportional to interest rate. It will also impact the subordinate convertibel zero coupon bond.

2. Price of stock: it will impact the subordinate convertible zero coupon bond because if the price is not reaching the fair value of conversion one will not able to convert the zero coupon bond into the equity.

3. For bond other factors which will imapct is : maturity, spread at issuance and subordination, since it is zero coupon bond there is no impact of coupon on it.

4. Duration and convexity will also impact the value of bond. Higher the duration and convexity of the bond higher will be its impact.

5. Market risk: it is one of the prime factor which impact the valuation of the equity. Market risk leads to volatitlity in the stock market and it can change the expected return and beta of the stock which imapct the valuation of the stock.

6. EPS is also impact the equity price, higher EPS is lead to higher valuation of equity.

7. Liquidity risk is one of the risk which imapct all the claims outstanding.

jeff jeffy answered 2 years ago

A firm has issued 5,000 10 year zero coupon bonds outstanding (par value 1,000) with a...

A firm has issued 5,000 10 year zero coupon bonds outstanding (par value 1,000) with a YTM of 4%. It has 100,000 common shares outstanding. The stock has a Beta of 1.1. The risk free rate is 2%, and the market return is 8%. The firm is expected to pay a 2.00 dividend and has a growth rate of 3%. If the firm tax rate is 20%, what is the company’s WACC?

Assume that the firm has a bond outstanding that has a coupon rate of 6% and...

Assume that the firm has a bond outstanding that has a coupon rate of 6% and 20 years until maturity. The face value of the bond is $10,000,000 and the coupon payments are made annually. What is the present value of the bond (i.e. current price)? Assume the cost of equity is 12%, the cost of debt is 4% and WACC is 10%. Show calculation Answers: a. $6,594,574.51 b. $12,718,065.27 c. $5,518,333.83 d. $8,276,991.20

Assume the spot rates for one-, two-, and three-year zero coupon bonds are 2%, 3%, and...

Assume the spot rates for one-, two-, and three-year zero coupon bonds are 2%, 3%, and 4%. (a)Calculate P(1), P(2), and P(3).(b)Calculate the price of a three-year 8% coupon bond, with interest paid annually.(c)Calculate ?1,1, ?1,2, and ?2,1(d)Calculate F(1,1), F(1,2), and F(2,1).(e)If ?1,3= 5%, calculate P(4).

Your firm has issued ten-year zero-coupon bonds with a $1,000 face value. If the bonds are...

Your firm has issued ten-year zero-coupon bonds with a $1,000 face value. If the bonds are currently selling for $514.87. What is the yield to maturity?

Problem 17-18 Equity as an Option Sunburn Sunscreen has a zero coupon bond issue outstanding with...

Problem 17-18 Equity as an Option Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the firm’s assets is $11,900. The standard deviation of the return on the firm’s assets is 28 percent per year, and the annual risk-free rate is 4 percent per year, compounded continuously. Based on the Black–Scholes model, what is the market value of the firm’s equity and debt? (Do not...

The Value of Convertible Bonds to Equity and Fixed Income Investors Convertible bonds can be viewed...

The Value of Convertible Bonds to Equity and Fixed Income Investors Convertible bonds can be viewed as hybrid securities that offer investors some of the benefits of fixed income as well as equity holdings. Equally importantly though, convertible bonds include many optionalities that enhance their value substantially beyond either regular bonds or equities, to both holders and issuers. Some of these optionalities include the option to the issuer to call the bond, as well as the option to the holder...

(a) Trump Limited has an outstanding issue of convertible bonds with $1,000 par value. These bonds...

(a) Trump Limited has an outstanding issue of convertible bonds with $1,000 par value. These bonds are convertible into 50 shares of Ali’s common stock. The convertible bonds have a 10% coupon with 10-year maturity. The yield-to-maturity for a straight bond of similar risk is 8%. i. Calculate the straight bond value of the convertible bond. ii. What is the conversion value of the convertible bond when the market price of Trump’s common stock is $30 per share? iii. If...

Company ABC currently has the following financing outstanding. Bond: 10,000 10-year zero coupon bonds with a...

Company ABC currently has the following financing outstanding. Bond: 10,000 10-year zero coupon bonds with a quoted price of $500 (par value is $1000). Common Stock: 50,000 shares of common stock. The company just paid $2 per share dividends to its investors. The dividends are expected to be constant in the future. The beta of the stock is 1.1. The company is considering a new project which has the similar risk as the existing business. The market portfolio’s expected return...

Burning Ltd. currently has the following financing outstanding. Bond: 10,000 10-year zero coupon bonds with a...

Burning Ltd. currently has the following financing outstanding. Bond: 10,000 10-year zero coupon bonds with a quoted price of $500 (par value is $1000). Common Stock: 50,000 shares of common stock. The company just paid $2 per share dividends to its investors. The dividends are expected to be constant in the future. The beta of the stock is 1.1. The company is considering a new project which has the similar risk as the existing business. The market portfolio’s expected return...

Eastern Digital Corp has a convertible bond outstanding with a coupon rate of 9% and a...

Eastern Digital Corp has a convertible bond outstanding with a coupon rate of 9% and a maturity date of 20 years. The market rate of interest on bonds of the same risk class carry a 10% return. The conversion ratio is 40. The company’s common stock is selling for $18.25 per share. The bond is selling for $970. What is the conversion value? What is the conversion premium?

Question