Calculate the company’s current debt ratio.
1- Pierre Imports recently issued two types of bonds. The
first issue consisted of 10-year straight debt with a 10 percent annual coupon.
The second issue consisted of 10-year bonds with a 9 percent annual coupon and
attached warrants. Both issues sold at their $1,000 par values. The company’s
stock is currently selling for $24.50 per share.
a. Calculate the implied value of the warrants attached to
each bond.
b. Discuss the advantages to the investor of purchasing
bonds with warrants instead of straight bonds?
c. Discuss 2-3 advantages to the company of issuing a bond
with warrants instead of straight bonds?
d. What will happen to the value of the bond with warrants
if the company’s stock price increases? Why?
e. What will likely happen to the value of the straight bond
if the company’s stock price increases? Why?
2.- Epoty Corporation is evaluating whether to lease or
purchase needed equipment at a cost of $10,000. If the equipment is leased, the
lease would not have to be capitalized. The company’s balance sheet prior to
the acquisition of the equipment is as follows.
a. Calculate the company’s current debt ratio?
Equipment cost $10,000
Current Balance Sheet
Current assets $50,000
Debt $35,000
Net Fixed assets 40,000
Equity 55,000
Total assets $90,000
Total claims $90,000
b. Calculate the company’s debt ratio if it purchases the
equipment.
c. Calculate the company’s debt ratio if it leases the
equipment?
d. Will the company’s ROA and ROE ratios be affected by its
decision to lease or purchase? Why or why not?
e. What factors should the company consider in coming to its
decision other than net advantage to leasing? Why?
