This section is from the book "Problems In Private Finance", by Charles W. Gerstenberg. See also: The Private Equity Edge: How Private Equity Players and the World's Top Companies Build Value and Wealth.
1. May stock be issued convertible into bonds at the option of the stockholder? At the option of the company? (S. C. L. of N. Y., Sec. 61.)
2. May a company sell its bonds at 80 and make them convertible into stock, par for par? (S. C. L. of N. Y., Sec. 56-61.)
3. Southern Pacific convertible 5's are convertible into the stock of that company, par for par. At what price is each selling?
4. Which usually sell the higher, convertible bonds or the stock into which they are convertible? Give reasons. (pp. 324-325.)
5. Southern Pacific convertible 4's are convertible into common stock at 130. At what price is each selling? Explain the difference in price. What would happen if the stock approached nearer to 130?
6. If Southern Pacific convertible 5's were selling at the same price as the stock, which would you buy - the stock, or the bonds? Why?
7. Explain the mathematics of protecting short sales (pp. 428-429) by the purchase of convertible bonds.
8. Conversion is a privilege of the bondholder or noteholder. What reasons prompt a corporation to make its bonds convertible?
9. Read Rule 5, p. 354, before solving this problem. A company has an issue of $1,000,000 of bonds which are sold at 80 and bear interest at the rate of 6 per cent. A proposition is now made to refund the bonds at 110, out of the proceeds of the new issue of 4 per cent bonds to be sold at 80 and to run for the same time as the unexpired term of the old bonds, viz., 75 years. Assume that the company puts through the proposition, and arranges to retire during the life of the bonds and in equal annual amounts, the bonds required to be issued in excess of $1,000,000 in order to carry out the proposition. How much will the company save, making no allowance for interest on annual savings of interest?
10. If you held a note of the Chicago Elevated Railways (see p. 1009), what questions would you have determined before deciding whether or not to agree to the extension of the notes? Would you change your answer if you had been a stockholder as well?
11. Would your answer be different in the case of the Toledo Traction Company bonds? (p. 320.)
12. Suppose that the holder of bond No. 26 of the Pensacola and Atlantic R. R. Co. (p. 336) does not surrender his bond for redemption; what will happen?
13. What are all the other disadvantages to the investor of redeemable bonds?
14. What offsetting advantage does the company usually offer? (pp. 220-221; 325-336 and 1022.)
15. Why are the redemption prices of the Bethlehem Steel Corporation notes (p. 1022) fixed at varying rates?
16. Is the redemption feature of the Jones-Laughlin bonds "mandatory"or "solicited"? (pp. 220-223.)
17. Where redemption is solicited, will the price demanded by bondholders be more, or less, than the market price?
18. What effect has the redemption feature on the price of the notes?
19. A company is about to raise $10,000,000 for which it will pay 8 per cent. Should it issue long-term redeemable bonds, redeemable at 108, or should it issue short-term (2-year) notes and pay a 2 per cent commission to the issuing bankers, assuming that high money rates are expected to last for about six years?
20. Suppose interest rates were very high (i.e., 7 per cent or more) and the Jones-Laughlin Steel Co. wanted to raise $5,000,000 for additions and improvements. Assume that $20,000,000 of its 5 per cent mortgage bonds (pp. 190-191) had previously been issued. What would you advise the company to do?
21. Why are the maturities of the Mississippi County, Arkansas Drainage District Bonds (p. 1026) and the table of drawings for the amortization of the bonds of the Mortgage Bond Company (pp. 261-262) arranged as they are?
22. What are the differences between the methods employed in the 21st problem and the method employed to retire the Erie Equipment Trust Notes? (pp. 299-312.)
23. What method of making payments into the sinking fund is required on the Jones-Laughlin mortgage? (pp. 219-220.) Can you suggest any reasons for employing a sinking fund here?
24. For what kinds of companies, respectively, is each of the methods of making payments into a sinking fund, as described in the Syllabus, better?
25. What method of investing the sinking fund is employed in the Jones-Laughlin mortgage? (pp. 219-223.)
26. Of the three methods of investing sinking-fund payments described in the Syllabus, which do you consider the most advantageous (a) for the corporation; (b) for the investor?
27. What difference does it make whether the bonds are canceled or kept alive: (a) to the corporation; (b) to the investor?
28. Prepare tables showing in tabular form the annual amount of sinking fund, annual amount of interest accrued on bonds held in sinking fund, total amount to invest each year (from October 1, 1915, to April 1, 1929), amount of bonds purchased annually for sinking fund, annual cash balance, and total amount of bonds held in sinking fund each year, where the issue is $1,000,000 5 per cent 15-year bends, due April 1, 1929; interest payable April 1 and October 1. Issue to be purchased or drawn each year at par and kept alive by the trustee. (pp. 1023-1025.)
29. A steel company has outstanding $2,000,000 5 per cent bonds due in three years, and redeemable at 105. The mortgage requires the company to pay $50,000 annually into the sinking fund. The treasurer of the company reports to its directors that it has over $2,000,000 on hand which it cannot profitably use in the business. He advocates the redemption of the bonds at 105, claiming that this will save the company $100,000 a year in interest and $50,000 a year in sinking fund payments. As a director of the company, would you vote in favor of the treasurer's recommendation?