Project #4930 - Financial Managment

Problem 19-4 
Lease versus Buy

Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply:

 

  1. The machinery falls into the MACRS 3-year class.
  2. Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance.
  3. The firm's tax rate is 30%.
  4. The loan would have an interest rate of 13%. (Suppose that only interest payments are made at the end of each year and the whole loan will be paid back at the end of year 4.)
  5. The lease terms call for $400,000 payments at the end of each of the next 4 years.
  6. Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $300,000 at the end of the 4th year.

 

 

  MACRS
Year Allowance Factor
1 0.3333
2 0.4445
3 0.1481
4 0.0741

 

What is the NAL of the lease? Round your answer to the nearest cent.

$  

Problem 20-3 
Warrants

Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $26.

 

  1. Calculate the exercise value of the firm's warrants if the common sells at each of the following prices: (1) $20, (2) $25, (3) $30, (4) $100. (Hint: A warrant's exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.) 
    (1) $20 $  
    (2) 25 $  
    (3) 30 $  
    (4) 100 $  


  2. Assume the firm's stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 75 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm's straight bonds yield 10%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.) Round your answer to two decimal places. 
     

    What dollar coupon must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.) Round your answer to the nearest dollar. 
    $  

 

Problem 20-4 
Convertible Premiums

The Tsetsekos Company was planning to finance an expansion. The principal executives of the company all agreed that an industrial company such as theirs should finance growth by means of common stock rather than by debt. However, they felt that the current $35 per share price of the company's common stock did not reflect its true worth, so they decided to sell a convertible security. They considered a convertible debenture but feared the burden of fixed interest charges if the common stock did not rise enough in price to make conversion attractive. They decided on an issue of convertible preferred stock, which would pay a dividend of $1.70 per share.

 

  1. The conversion ratio will be 1.0; that is, each share of convertible preferred can be converted into a single share of common. Therefore, the convertible's par value (and also the issue price) will be equal to the conversion price, which, in turn, will be determined as a premium (i.e., the percentage by which the conversion price exceeds the stock price) over the current market price of the common stock. What will the conversion price be if it is set at a 10% premium? Round your answer to the nearest cent.
    $   

    At a 20% premium? Round your answer to the nearest cent.
    $   

  2. Should the preferred stock include a call provision? 
     
    I. No, the company does not want to force conversion under any circumstance.
    II. Yes, to be able to force conversion if the market rises above the call price.
    III. Yes, to be able to force conversion if the market falls below the call price.

 

 

Subject Business
Due By (Pacific Time) 04/29/2013 12:00 am
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