Finance Task5

SELECT ONLY ONE OPTION – DO NOT DO BOTH. READ DETAILS AND INSTRUCTIONS CAREFULLY. THANK YOU

Option #1

Question 1: Expected Yield

You own a 5% bond maturing in two years and priced at 87%. Suppose that there is a 10% chance that at maturity the bond will default and you will receive only 40% of the promised payment. What is the bond’s promised yield to maturity? What is its expected yield (i.e., the possible yields weighted by their probabilities)?

Question 2: Default Probability

The following table shows some financial data for two companies:

	A	B
Total assets	$1,552.1	$1,565.7
EBITDA	-60	70
Net income + interest	-80	24
Total liabilities	814.0	1537.1

a. Calculate the probability of default for the two companies.

b. Which company has the higher probability?

Question 3: Bond Contracts

Refer to the following information:

Amount issued	$400 million
Offered	Issued at a price of 101.50% plus accrued interest (proceeds to company 101.300%) through First Boston Corporation.
Interest	9.25% per annum, payable February 15 and August 15.

1. Suppose the debenture was issued on September 1, 1992, at 101.50%. How much would you have to pay to buy one bond delivered on September 15? Don’t forget to include accrued interest.
2. What is the amount of the first interest payment?

Question 4: Covenants

ABC Corp. is prohibited from issuing more senior debt unless net tangible assets exceed 150% of senior debt. Currently, the company has outstanding $100 million of senior debt and has net tangible assets of $201 million. How much more senior debt can ABC Corp. issue?

Question 5: Convertible Bonds

ZEN Inc. is financed by 3 million shares of common stock and by $5 million face value of 8% convertible debt maturing in 2026. Each bond has a face value of $1,000 and a conversion ratio of 200. What is the value of each convertible bond at maturity if ZEN’s net assets are:

1. $30 million?
2. $4 million?
3. $20 million?
4. $5 million?

Your paper should be three pages in length (excluding cover page and references) and formatted. Be sure to discuss and reference concepts taken from the assigned textbook reading and relevant research. Review the grading rubric to see how you will be graded for this assignment.

Option #2

It was one of Avery’s most puzzling cases. That morning Cornelius Upton, the autocratic CEO of Upton Oil, was found dead in a pool of blood on his bedroom floor. He had been shot but the door and windows were bolted on the inside and there was no sign of the murder weapon. Avery looked in vain for clues in Upton’s bedroom and office. He had to take another tack. He decided to investigate the financial circumstances surrounding Upton’s demise.

The company’s capital structure was as follows:

• 5% debentures: $250 million face value. The bonds mature in 10 years and offer a yield of 12%.
• Stock: 30 million shares, which closed at $9 a share the day before the murder.
• 10% subordinated convertible notes: The notes mature in one year and are convertible at any time at a conversion ratio of 110.

The day before the murder these notes were priced at 5% more than their conversion value. Yesterday Upton had flatly rejected an offer by W. Forkes to buy all of the common stock for $10 a share. With Upton out of the way, it appeared that Forkes’ offer would be accepted, much to the profit of Upton Oil’s other shareholders. Upton’s two nieces, Lindsay and Elise, and his nephew Paul all had substantial investments in Upton Oil and had bitterly disagreed with Upton’s dismissal of Forkes’s offer. Their stakes are shown in the following table:

	5% Debentures (Face Value)	Shares of Stock	10% Convertible Notes (Face Value)
Lindsay	$4 million	1.2 million	$0 million
Paul	0	0.5	5
Elise	0	1.5	3

All debt issued by Upton Oil would be paid off at face value if Forkes’s offer went through. Holders of the convertible notes could choose to convert and tender their shares to Forkes. Avery kept coming back to the problem of motive. Which niece or nephew, he wondered, stood to gain most by eliminating Upton and allowing Forkes’s offer to succeed?

Help Avery solve the case. Which of Upton’s relatives stood to gain most from his death? Summarize why you think each relative may or may not have been responsible for the death in regards to their own share within the company.

Your paper should be 3-4 pages in length (excluding cover page and references) and formatted. Be sure to discuss and reference concepts taken from the assigned textbook reading and relevant research. Review the grading rubric to see how you will be graded for this assignment.