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1. What is the bond's conversion ratio? If the following is true:
Years to maturity: 10 Stock price: $30.00
Par value: $1,000.00 Conversion price: $35.00
Annual coupon: 5.00% Straight-debt yield: 8.00%

2. What is the bond's straight-debt value? If the following is true:
Years to maturity: 10 Stock price: $30.00
Par value: $1,000.00 Conversion price: $35.00
Annual coupon: 5.00% Straight-debt yield: 8.00%

3. Mariano Manufacturing can issue a 25-year, 8.1% annual payment bond at par. Its investment bankers also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket. The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%, which would represent an after-tax risk premium. What coupon rate must be set on the preferred in order to issue it at par?

4. thompson Enterprises has $5,000,000 of bonds outstanding. Each bond has a maturity value of $1,000, an annual coupon of 12.0%, and 15 years left to maturity. The bonds can be called at any time with a premium of $50 per bond. If the bonds are called, the company must pay flotation costs of $10 per new refunding bond. Ignore tax considerations--assume that the firm's tax rate is zero.
The company's decision of whether to call the bonds depends critically on the current interest rate on newly issued bonds. What is the breakeven interest rate, the rate below which it would be profitable to call in the bonds?

5. New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called.
The amortization of flotation costs reduces taxes and thus provides an annual cash flow. What will the net increase or decrease in the annual flotation cost tax savings be if refunding takes place?

6. Rainier Bros. has 12.0% semiannual coupon bonds outstanding that mature in 10 years. Each bond is now eligible to be called at a call price of $1,060. If the bonds are called, the company must replace them with new 10-year bonds. The flotation cost of issuing new bonds is estimated to be $45 per bond. How low would the yield to maturity on the new bonds have to be in order for it to be profitable to call the bonds today, i.e., what is the nominal annual "breakeven rate"?

7. New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called.
What is the NPV if NYW refunds its bonds today?

8.The common stock of Southern Airlines currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000) sell for $850. Each debenture can be converted into 25 shares of common stock at any time before 2025. What is the conversion value of the bond?

9. Which of the following statements concerning the MM extension with growth is NOT CORRECT?

A The total value of the firm increases with the amount of debt.

B The value of a growing tax shield is greater than the value of a constant tax shield.

C The tax shields should be discounted at the cost of debt.

D For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.

E For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions.

10. According to the MM extension with growth, what is the value of Kitto's tax shield? If the following is true:
EBIT: $200,000 rsU: 11%
Debt: $300,000 T: 40%
rd: 8% EBIT retained: 20%
g: 6%

11. According to the MM extension with growth, what is Kitto's unlevered value? If the following is true:
EBIT: $200,000 rsU: 11%
Debt: $300,000 T: 40%
rd: 8% EBIT retained: 20%
g: 6%

12. The market value of Firm L's debt is $200,000 and its yield is 9%. The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is Firm L's cost of equity?

13. What is the value (in millions) of Wilson Dover's equity if it is viewed as an option? If the following is true: 
Total value = P = $500.0 d1 = 1.910485
Debt = X = $200.0 N(d1) = 0.9720
Volatility (s) = 0.6 d2 = 1.310485
rRF = 5% N(d2) = 0.9050

14. Great Subs Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently financed using 20% debt at a cost of 8%. Great Subs’ analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 cash flow includes a horizon value of $107 million.) The acquisition would be made immediately, if it is to be undertaken. Eastern's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8%, and the market risk premium is 4%. What is the appropriate rate for use in discounting the free cash flows and the interest tax savings?

15. Kelly Tubes is considering a merger with Reilly Tires. Reilly’s market-determined beta is 0.9, and the firm currently is financed with 20% debt, at an interest rate of 8%, and its tax rate is 25%. If Kelly acquires Reilly, it will increase the debt to 60%, at an interest rate of 9%, and the tax rate will increase to 35%. The risk-free rate is 6% and the market risk premium is 4%. What will Reilly’s required rate of return on equity be after it is acquired?

16. The market value of Firm L's debt is $200,000 and its yield is 10%. The firm's equity has a market value of $300,000, its earnings are growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 14%. Under the MM extension with growth, what would Firm L's total value be if it had no debt?

17, The market value of Firm L's debt is $200,000 and its yield is 9%. The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is Firm L's cost of equity?