Reference no: EM132647229

Question 1: Evaluating Annie? Hegg's Proposed Investment in Atilier Industries Bonds To Doa.

Question b: Annie Hegg has been considering investing in the bonds of Atilier Industries. The bonds were issued 5 years ago at their $1,000 par value and have exactly 25 years remaining until they mature. They have an 8.0% coupon interest? rate, are convertible into 50 shares of common? stock, and can be called any time at $1,080.00. The bond is rated Aa by? Moody's. Atilier? Industries, a manufacturer of sporting? goods, recently acquired a small? athletic-wear company that was in financial distress. As a result of the? acquisition, Moody's and other rating agencies are considering a rating change for Atilier bonds. Recent economic data suggest that expected? inflation, currently at 5.0% ?annually, is likely to increase to a 6.0% annual rate.

Annie remains interested in the Atilier bond but is concerned about? inflation, a potential rating? change, and maturity risk. To get a feel for the potential impact of these factors on the bond? value, she decided to apply the valuation techniques she learned in her finance course.

If the price of the common stock into which the bond is convertible rises to $30.00 per share after 5 years and the issuer calls the bonds at $1,080.00?, should Annie let the bond be called away from her or should she convert it into common? stock?

For each of the following required? returns, calculate the? bond's value, assuming annual interest. Indicate whether the bond will sell at a? discount, at a? premium, or at par value.

?(1) Required return is 6.0%.

?(2) Required return is 8.0%.

?(3) Required return is 10.0%.

Question c: Repeat the calculations in part ?(b?), assuming that interest is paid semiannually and that the semiannual required returns are? one-half of those shown. Compare and discuss differences between the bond values for each required return calculated here and in part ?(b?) under the annual versus semiannual payment assumptions.