A convertible security (usually convertible bonds or convertible preferred stock) may be tendered at the option of the holder for shares of common stock in the issuing firm. In other words, the bonds or preferred stock may be converted to common stock. Like warrants, convertibles can lead to diluted earnings, because new shares of common stock are issued. However, unlike warrants, convertibles: A. result in new capital for the firm. B. do not result in new capital for the firm. Consider the case of Cheung Zap Inc.: Cheung Zap Inc. just issued 17-year convertible bonds at a par value of $ 1,000. At any time before maturity, investors have the option to exchange their bonds for shares of Cheung's common stock at a conversion price of $60.48. Cheung's convertible bonds pay a 7.56% annual coupon, but if Cheung had issued straight - debt bonds (no conversion), it would have had to pay 12.60% annual interest. Based on the information available, complete the table: Value Conversion ratio of Cheung's bond issue:_ A. 15.12 B. 16.53 C. 10.80 D .19.84 Straight - debt value of this convertible debt issue:. per bond A. $914.48 B. $520.20 C. $653.20 D. $ 1,200.00 Value of the convertible option: _ per bond A. $346.80 B. -$200.00 C. $479.80 D. $85.52 Cheung's common stock currently sells for $37 per share. Would an investor want to convert the bonds now? A. No B. Yes Suppose analysts expect Cheung to pay a dividend of $3.00 per share at the end of the year and for the dividend to grow at a constant rate of 4.5% per year. What is the expected conversion value five years from now? A. $762.20 per share B. $571.65 per share C. $1,143.30 per share D. $2,788.73 per share

A project that costs $3,400 to install will provide annual cash flows of $1,000 for each of the next 6 years. a). What is the NPV if the discount rate is 14%? (Solved, answer is NPV=388.67) b). How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter answers as a percent rounded to 2 decimal places.)

Some financial instruments such as convertible bonds, preferred stocks, warrants and options can have both debt and shareholder’s equity features. They can be converted into common stock or into preferred stocks by investors. This topic has been debated for several years on whether: Viewpoint 1: Issuers should account for an instrument with both liability and equity characteristics entirely as a liability or entirely as an equity instrument depending on which characteristic governs. Viewpoint 2: Issuers should account for an instrument as consisting of a liability component and an equity component that should be accounted for separately. Which of the two viewpoints do you favor?  Develop an argument in support of your choice.  In considering this question, you should disregard the current position of the FASB on the issue. Instead, focus on conceptual issues regarding the practicable and theoretically appropriate treatment, unconstrained by US GAAP and IFRS. Also, focus your…