習(xí)題答案PrinciplesofCorporateFinance第十版Chapter24

1、Chapter 24 - The Many Different Ki nds of DebtCHAPTER 24The Many Different Kinds of DebtAnswers to Problem Sets1. a.High-grade utility bondsb. Industrial holding companiesc. Industrial bondsd. Railroadse. Asset-backed security.2. a. Decreasesb. Impossible to sayc. Impossible to say. For example, if

2、the bond has a high coupon and is soldat a premium at issue, the prospect of drawings at par could decrease value. For an original-issue discount bond, the effect could be reversed.3. a.You would like an issue of junior debt.b. You prefer it not to do so (unless it is also -junior debt). The existin

3、gproperty may not be sufficient to pay off your debt.4. a. First Boston Corporationb. Bank of America National Trust and Savings Associationc. $986.14d. Registerede. 103.0%.5. a.Approximately 99.489 + 8.25/12 = 100.18%.b.04125 X 250 = $10.3 million on Feb 15, 1993.c.After making earlier sinking fund

4、 payments, $12.5 million remains to berepaid on Aug 15, 2022.d. 2008 (but see footnote 20 for some possible complications).24-96. Private placements: typically have simpler loan agreementswhich maynevertheless contain“ custom ” features; have mornegsetnrit covenants; aremore easily renegotiated.7.a.

5、False. Lenders usually retain some recourse; e.g., they may demand a completion guarantee.b.True, but some new securities (e.g., Eurobonds) survive even when the original motive for issuing them disappears.c.False. The borrower has the option.d.True. But debt issues with weak covenants -suffered in

6、such takeovers.e.True. The costs of renegotiation are less for -private placements.8.a.1,000/47 = 21.28b.1,000/50 = $20.00c.21.28 X 41.50 = $883.12, or 88.31%d.650/21.28 = $30.55e.No (not if the investor is free to convert immediately)f.$12.22 (i.e., (910 - 650)/21.28g.(47/41.50) - 1 = .13, or 13%h.

7、When the price reaches 102.75% of face value.9.a.Falseb.Truec.Falsed.True10. If the bond is issued at face value and investors demand a yield of 8.25%,then, immediately after the issue, the price will be $1,000. As time passes, the price will gradually rise to reflect accrued interest. For example,

8、justbefore the first (semi-annual) coupon payment, the price will be $1,041.25, and then, upon payment of the coupon ($41.25), the price will drop to $1,000. This pattern will be repeated throughout the life of the bond as long as investors continue to demand a return of 8.25%.11. Answers here will

9、vary, depending on the company chosen. Some key areasthat should be examined are: coupon rate, maturity, security, sinking fund provision, and call provision.12. Floating-rate bonds provide bondholders with protection against inflation and rising interest rates, but this protection is not complete.

10、In practice, the extent of the protection depends on the frequency of the rate adjustments and the benchmark rate. (Not only can the yield curve shift, but yield spreads can shift as well.)Similarly, puttable bonds provide the bondholders with protection against an increase in default risk, but this

11、 protection is not absolute. If the company problems suddenly become public knowledge, the value of the company may fall so quickly that bondholders might still suffer losses even if they put their bonds immediately.13. First mortgage bondholders will receive the $200 million proceeds from the sale

12、of the fixed assets. The remaining $50 million of mortgage bonds then rank alongside the unsecured senior debentures. The remaining $100 million in assets will be divided between the mortgage bondholders and the senior debenture holders. Thus, the mortgage bondholders are paid in full, the senior de

13、benture holders receive $50 million and the subordinated debenture holders receive nothing.14. If the assets are sold and distributed according to strict precedence, the following distribution will result. In Subsidiary A, the $320 million of debentures will be paid off and ($500 millio n $320 milli

14、o n) = $180 millio n will be remitted to the pare nt. In Subsidiary B, the $180 million of senior debentures will be paid off and ($220 millio n -$180 millio n) = $40 millio n of the $60 millio n subordi nated debentures will be paid. In the holding company, the real estate will be sold and ($180 mi

15、llion + $80 million) = $260 million will be paid in partial satisfaction of the $400 million senior collateral trust bonds.15. a. Typically, a variable-rate mortgage has a lower interest rate than acomparable fixed-rate mortgage. Thus, you can buy a bigger house for the same mortgage payment if you

16、use a variable-rate mortgage. The second consideration is risk. With a variable-rate mortgage, the borrowerassumes the interest rate risk (although in practice this is mitigated somewhat by the use of caps), whereas, with a fixed-rate mortgage, the lending institution assumes the risk.b. If borrower

17、s have an option to prepay on a fixed-rate mortgage, they arelikely to do so when interest rates are low. Of course, this is not the time that lenders want to be repaid because they do not want to reinvest at the lower rates. On the other hand, the option to prepay has little value if rates are floa

18、ting, so floating rate mortgages reduce the reinvestment risk for holders of mortgage pass-through certificates.16. A sharp increase in interest rates reduces the price of an outstanding bond relative to the price of a newly issued bond. For a given call price, this implies that the value to the fir

19、m of the call provision is greater for the newly issued bond. Other things equal, the yield of the more recently issued bonds should be greater, reflecting the higher probability of call. Notice, however, that the outstanding bond will probably have a lower call price and perhaps a shorter period of

20、 call protection; these may be offsetting factors.17. If the company acts rationally, it will call a bond as soon as the bond price reaches the call price. For a zero-coupon bond, this will never happen because the price will always be below the face value. For the coupon bond, there is some probabi

21、lity that the bond will be called. To put this somewhat differently, the company s option to call is meaningless for the zero-coupon bond, but has some value for the coupon bond. Therefore, the price of the coupon bond (all else equal) will be less than the price of the zero, and, hence, the yield o

22、n the coupon bond will be higher.18. a.Using Figure 24.2 in the text, we can see that, if interest rates rise, thes interest to exercise its option, andchange in the price of the noncallable bond will be greater than the change in price of the callable bond.b. On that date, it will be in one party t

23、he bonds will be repaid.19. See figure on next page.20. Alpha Corp. s net tangible asset limit is 200 percent of senior debt. Therefore,with net tangible assets of $250 million. Alpha s total debt cannot exceed$125 millio n. Alpha can issue an additi onal $25 milli on in senior debt.21. a. There are

24、 two primary reas ons for limitati ons on the sale of compa nyassets. First, coup on and sinking fund payme nts provide a regular check on the company s solvency. If the firm does not have the cash, the bon dholders would like the shareholders to put up new money or default. But this check has littl

25、e value if the firm can sell assets to pay the coup on or sinking fund con tributi on. Second, the sale of assets in order to reinv est in more risky ven tures harms the bon dholders.b. The payme nt of divide nds to shareholders reduces assets that can be used to pay off debt. In the extreme case, a

26、 divide nd that is equal to the value of the assets leaves bon dholders with nothing.c. If the existing debt is junior, then the original debtholders lose by having the new debt rank ahead of theirs. If the existing debt is senior, then the issua nee of additi onal senior debt means that the same am

27、ount of equitysupports a greater amount of debt; i.e., the firm s leverage has in creased,and the firm faces a greater probability of default. This harms the original debtholders.22. Project finance makes sense if the project is physically isolated from the pare nt, offers the len der tan gible secu

28、rity and invo Ives risks that are better shared betwee n the pare nt and others. The best example is in the financing of majorforeign projects, where political risk can often be minimized by involving international len ders.23. a. With a $1,000 face value for the bon ds, a bon dholder can convert on

29、ebo nd in to: $1,000/$25 = 40 sharesThe con version value is: 40$30 = $1,200b. A con vertible sells at the conv ersi on value only if the conv ertible is certa in to be exercised. You can think of owning the conv ertible as equivale nt to owning a bond plus an optio n to buy the shares. The price of

30、 the con vertible bond exceeds the conv ersi on value by the value of this call. Also, if the in terest on the conv ertible exceeds the divide nds on forty shares of com mon stock, the conv ertible s value reflects this additi onalin come.free gic. Yes. When Surplus calls, the price of the conv erti

31、bles will fall to the con versi on value. That is, bon dholders will be forced to convert in order to escape the call. By not calli ng, Surplus is handing bon dholders a worth 25% of the bond s face value i.e., (130105)/100, at the expense24. a.of the shareholders.If the fair rate of retur n on a 10

32、-year zero-coup on non-conv ertible bond is 8%, the n the price would be:10$1,000/1.08 10 = $463.19The con version value is: 10$50 = $500By converting, you would gai n: $500- $463.19 = $36.81That is, you could conv ert, sell the ten shares for $500, and the n buy a comparable straight bond for $463.

33、19. Otherwise, if you do n ot convert, and the bond is no Ion ger conv ertible in the future, you will own a noncon vertible Piglet bond worth $463.19b. Inv estors are payi ng ($550.00- $463.19) = $86.81 for the option to buyten shares.9c. In one year, bond value = $1,000/1.08= $500.25(i.e., the val

34、ue of a comparable non-conv ertible bond)Then the value of the convertible bond is: $500.25 + $86.81 = $587.0625.a.Assume a face value of $1,000. The conv ersi on price is:$1,000/27 = $37.04b.The con version value is: 27$47 = $1,269c. Yes, you should convert because the value of the shares ($1,269)

35、is greater than the maturity value of the bond.26. a. The yield to maturity on the bond is computed as follows:15$1,000 = $532.15(1 + r)151,000/532.15 = 1.8792 = (1 + r)1.8792 (1/15) = 1.0430 = (1 + r)r = 0.0430 = 4.30%b. The value of the non-conv ertible bond would be:15$1,000/(1.10) 15 = $239.39Th

36、e con versi on opti on was worth:$532.15 -$239.39 = $292.76c. Conv ersi on value of the bonds at time of issue was:8.76 $50.5 = $442.38d. The in itial conv ersi on price was:$532.15/8.76 = $60.75e. Call price in 2005 is:$603.711.0430 6 = $777.20Therefore, the con vers ion price is:$777.20/8.76 = $88

37、.72The in crease in the conv ersi on price reflects the accreted value of the bond since it has a zero coup on.f. If in vestors act rati on ally, they should put the bond back to Marriott as soon as the market price falls to the put exercise price.g. Call price in 2005 is:$603.711.0430 7 = $810.62Ma

38、rriott should call the bonds if the price is greater than $810.6227. The existi ng bonds provide $30,000 per year for 10 years and a payme nt of $1,000,000 in the ten th year. Assu ming that all bon dholders are exempt from in come taxes, the market value of the bonds is:$30,000$30,000$30,000$1,000,

39、000 小PV21010= $569,8801.10 1.10 1.10 1.10Thus, the debt could be repurchased with a payme nt of $569,880 today.From the sta ndpo int of the compa ny, the cash outflows associated with the bonds are $1,000,000 in the tenth year, and $30,000 per year, less ann ual tax sav ings of (0.35$30,000) = $10,5

40、00. Therefore, the n et cash outflow is($30,000 - $10,500) = $19,500 per year. To calculate the amount of new 10% debt supported by these cash flows, disco unt the after-tax cash flows at the aftertax in terest rate (6.5%):$19,500$19,500$19,500$1,000,000 水PV2$672,9081.0651.0651.0651.065In other word

41、s, the value of these bonds to the firm is $672,908 and the market value of the bonds is $569,880. The firm could repurchase the bonds for $569,880 and then issue $672,908 of new 10% debt that would require cash outflows with a prese nt value equal to that of the origi nal debt. The firm could also,

42、 of course, immediately pocket the differe nee ($103,028).Now suppose that bon dholders are subject to pers onal in come taxes. High- in come inv estors (i.e., those in high in come tax brackets) will favor low-coup on bonds and will bid up the prices of those bon ds. If the low coup on bonds are wo

43、rth more to the high-i ncome inv estor tha n they are to Dorlcote, the n Dorlcote should not repurchase the bon ds. (Note that, if Dorlcote issued the 3% bonds at face value and the n repurchases the bonds for $569,880, the n the compa ny will be liable for taxes on the gain.)28. The adva ntages of

44、sett ing up a separately finan ced compa ny for Hubco stemcould b(primarily from the attempt to align the interests of various parties with the successful operation of the plant. For example, the construction firm was also a shareholder in order to en sure that the pla nt would run accord ing to spe

45、cifications. By making it a separate entity, Hubco could also enter into con tracti on agreeme nts without the n eed to gai n approval from a pare nt compa ny. Similarly, if Hubco failed, the n no assets bey ond the projects attached. In depe ndence also allowed Hubco to desig n con tracts with supp

46、liers, customers, and funding sources to meet specific n eeds an d/or concerns.29. a. In the case of the safe project, the payoff always exceeds $7 milli on, so that the len der will always receive the promised payme nt. Ms. Blavatsky has a 40% chanee of receiving ($12.5 million - $7 million) = $5.5

47、 million and a 60% chanee of receiving ($8 million - $7 million) = $1 million. Thus, for the len der, the expected payoff is:(0.4$7 millio n) + (0.6$7 millio n) = $7 millio nFor Ms. Blavatsky, the expected payoff is:(0.4$5.5 millio n) + (0.6$1 millio n) = $2.8 millio nb. In the case of the risky pro

48、ject, there is a 40% chanee of a $20 million payoff, in which case the len der will receive $7 millio n and Ms. Blavatsky $13 millio n. There is also a 60% cha nee of a $5 millio n payoff, in which case the len der will receive $5 milli on and Ms. Blavatsky no thi ng.For the len der, the expected pa

49、yoff is:(0.4$7 millio n) + (0.6$5 millio n) = $5.8 millio nFor Ms. Blavatsky, the expected payoff is:(0.4$13 millio n) + (0.6$0 millio n) = $5.2 millio nThus, the lender will want Ms. Blavatsky to choose the safe project while Ms. Blavatsky will prefer the risky project.Suppose now that the debt is

50、convertible into 50% of the value of the firm. For the safe project, there is a 40% cha nce the len der will be faced with a choice of $7 million or 50% of the $12.5 million, which is $6.25 million; the lender will choose the former. There is also a 60% chance the lender will face a choice of $7 million or 50% of $8 million, which is $4 million; the lender will