QUESTIONS

Questions

Questions

Answer 1.

Straight bonds and call options on the company's underlying stock. If the company turns out to be a low-risk company, the straight bond component will have high value and the call option will have low value. However, if the firm turns out to be high-risk company, the straight bond component will have low value and the call option will have high value.

However, although risk has effects on value that cancel each other out in convertibles, the market and the buyer nevertheless must make an assessment of the firm's potential to value securities, and it is not clear that the effort involved is that much less than is required for a straight bond.

Another rationale for the issuance of convertible debt by a firm relates to agency costs. Convertible bonds can resolve agency problems associated with raising money. Straight bonds can be seen as risk-free bonds minus a put option on the assets of the firm. This creates an incentive for creditors to force the firm into low-risk activities. In contrast, holders of common stock have incentives to adopt high-risk projects. High-risk projects with negative NPV transfer wealth from bondholders to shareholders. If these conflicts cannot be resolved, the firm may be forced to pass up profitable investment opportunities. However, because convertible bonds have an equity component, less expropriation of wealth can occur when convertible debt is issued instead of straight debt. In other words, convertible bonds mitigate agency costs. One implication is that convertible debt has less-restrictive debt covenants than do straight bonds in the real world.

The price of the supply of a business is affected most of the time by the general market main heading during a session. In a bull market, the stock price of most companies will rise and in a accept market the stock price of most businesses will fall. One can measure the market sentiment by looking at stock catalogues or its future price movement(Adams, 2003).

The performance of the part or commerce that the company is in furthermore plays in part in working out the stock cost of the company. Most of the times, the supply cost of the companies in the identical commerce will move in tandem with each other. This is because market situation will generally affects the companies in the identical commerce the identical way. Of course, there are exceptions to this. Sometimes, the supply cost of a company will advantage from a part of awful report in its competitor if the companies are vying for the identical goal market(Bell, 2001).

In general, a business being taken-over is foreseen to get a supply price boost and the business taking over another company will know-how a drop in its share price. This is presuming that the business is being taken over at a premium, meaning it is being acquired over at a higher cost than its last swapped supply price. Depends on the agreed period, a business can be bought over by money or supply (of the acquirer) or a blend of ...