Reference no: EM132199584

Question -

Q1. Assume General Electric issues a 10-year bond at par value where the coupon rate and Kd (for GE) both equal 5%. General Electric stock currently sells for $11.50. The bond is convertible into common stock at a conversion price of $20, at any time; what is the conversion ratio? Is the conversion premium reasonable or expensive - why? Would you buy this convertible bond right now given what you know about markets and GE (meaning probability for capital gain, current dividend and probability of dividend growth in the near term)? How would you calculate the floor value of this security explain fully?

Q2. Review the materials posted on Blackboard â€" (especially the PowerPoint Presentation â€" Chapter 24 from the Ross Westerfield text) concerning the three hybrid transactions undertaken by Warren Buffett in connection with First Empire State Corporation (M&T Bank), Goldman Sachs and Bank of America. Explain how each deal represents an evolving deal structure where Mr. Buffett learned from the previous transaction and improved on the terms and conditions of the next deal. Use some numbers to make your points stronger. Why did Mr. Buffett exercise his warrants on the Goldman Sachs deal in 2011 when the sunset clause still had more than two years to run "use graphics to make your points?

Q3. Instagram, Inc., just issued a zero coupon convertible bond due in 10 years. The conversion ratio is 25 shares. The appropriate interest rate is 10%. The current stock price is $12 per share. Each convertible is trading at $400 in the market. What is the straight bond value? What is the conversion value? What is the option value of the bond?