Reference no: EM132731047
Problem - Paul Duncan, financial manager of EduSoft Inc., is facing a dilemma. The firm was founded 5 years ago to provide educational software for the rapidly expanding primary and secondary school markets. Although EduSoft has done well, the firm's founder believes an industry shakeout is imminent. To survive, EduSoft must grab market share now, and this will require a large infusion of new capital.
Because he expects earnings to continue rising sharply and looks for the stock price to follow suit, Mr. Duncan does not think it would be wise to issue new common stock at this time. On the other hand, interest rates are currently high by historical standards, and the firm's B rating means that interest payments on a new debt issue would be prohibitive. Thus, he has narrowed his choice of financing alternatives to (1) preferred stock, (2) bonds with warrants, or (3) convertible bonds.
As Duncan's assistant, you have been asked to help in the decision process by answering the following questions.
Mr. Duncan has decided to eliminate preferred stock as one of the alternatives and focus on the others. EduSoft's investment banker estimates that EduSoft could issue a bond-with-warrants package consisting of a 20-year bond and 27 warrants. Each warrant would have a strike price of $25 and 10 years until expiration. It is estimated that each warrant, when detached and traded separately, would have a value of $5.
The coupon on a similar bond but without warrants would be 10%.
Required -
(1) What coupon rate should be set on the bond with warrants if the total package is to sell at par ($1,000)?
(2) When would you expect the warrants to be exercised? What is a stepped-up exercise price?
(3) Will the warrants bring in additional capital when exercised? If EduSoft issues 100,000 bond-with-warrant packages, how much cash will EduSoft receive when the warrants are exercised? How many shares of stock will be outstanding after the warrants are exercised? (EduSoft currently has 20 million shares outstanding.)
(4) Because the presence of warrants results in a lower coupon rate on the accompanying debt issue, shouldn't all debt be issued with warrants? To answer this, estimate the anticipated stock price in 10 years when the warrants are expected to be exercised, and then estimate the return to the holders of the bond-with-warrants packages. Use the corporate valuation model to estimate the expected stock price in 10 years. Assume that EduSoft's current value of operations is $500 million and it is expected to grow at 8% per year.
(5) How would you expect the cost of the bond with warrants to compare with the cost of straight debt? With the cost of common stock (which is 13.4%)?
(6) If the corporate tax rate is 25%, what is the after-tax cost of the bond with warrants?
|
Compute the opt for star bus company
: Compute the OPT for Star Bus Company. 25% of its gross revenue from cargo operations were still outstanding as of the end of the quarter
|
|
What was the result of implementing cloud computing
: For this project, select an organization that has leveraged Cloud Computing technologies in an attempt to improve profitability or to give them a competitive.
|
|
What is the bond value in conversion
: At what year do you expect the bonds will be forced into conversion with a call? What is the bond's value in conversion when it is converted at this time
|
|
Compute the opt for fly away air lines
: Compute the OPT for Fly Away Air Lines.Gross receipts, Philippines (passenger operations) 10,000,000. Expenses, Japan (cargo operations) 1,250,000
|
|
How would you expect the cost of the bond
: How would you expect the cost of the bond with warrants to compare with the cost of straight debt? With the cost of common stock (which is 13.4%)
|
|
Describe the purpose of e-commerce technologies
: Describe the purpose of E-Commerce technologies and identify at least 3 technologies used in E-Commerce Web-Applications to facilitate transaction functionality
|
|
The level of actionable legal claim
: How should the courts handle these cases, where the company's complaints may, or may not rise to the level of an actionable legal claim?
|
|
Explain what caused the progression from one pilot
: In 150 words or more summarize the history of Part 121 flight crew requirements. Explain what caused the progression from one pilot to three or more pilots.
|
|
Find what is the net income for mas company
: Find What is the net income?. MAS Company's break-even sales are P530,000. The variable costs ratio to sales is 60%, while net income percentage to sales is 8%.
|