Solution

•If the company uses straight voting, the board of directors is elected one at a time. You
will need to own one-half of the shares, plus one share, in order to guarantee enough
votes to win the election. So, the number of shares needed to guarantee election under
straight voting will be:
Shares needed = (750,000 shares/2) + 1
Shares needed = 375,001
•And the total cost to you will be the shares needed times the price per share, or:
Total cost = 375,001 × $64
Total cost = $24,000,064
Solution
•If the company uses cumulative voting, the board of directors are all elected at once.
You will need 1/(N + 1) percent of the stock (plus one share) to guarantee election,
where N is the number of seats up for election. So, the percentage of the company’s
stock you need is:
Percent of stock needed = 1/(N + 1)
Percent of stock needed = 1/(7 + 1)
Percent of stock needed = .1250, or 12.50%
•So, the number of shares you need to purchase is:
Number of shares to purchase = (750,000 × .1250) + 1
Number of shares to purchase = 93,751
•And the total cost to you will be the shares needed times the price per share, or:
Total cost = 93,751 × $64
Total cost = $6,000,064
Solution
• If the company uses cumulative voting, the directors are all elected at once. You will
need 1/(N + 1) percent of the stock (plus one share) to guarantee election, where N is
the number of seats up for election. So, the percentage of the company’s stock you
need is:
Percent of stock needed = 1/(N + 1)
Percent of stock needed = 1/(4 + 1)
Percent of stock needed = .20, or 20%
• So, the number of shares you need is:
Number of shares to purchase = (27,300 × .20) + 1
Number of shares to purchase = 5,461
• So, the number of additional shares you need to purchase is:
New shares to purchase = 5,461 – 500
New shares to purchase = 4,961
Solution
• If interest rates rise, the price of the bonds will fall. If the price of the bonds is
low, the company will not call them. The firm would be foolish to pay the call
price for something worth less than the call price. In this case, the bondholders
will receive the coupon payment, C, plus the present value of the remaining
payments. So, if interest rates rise, the price of the bonds in one year will be:
P1 = C + C/.10
• If interest rates fall, the assumption is that the bonds will be called. In this case,
the bondholders will receive the call price, plus the coupon payment, C. So, the
price of the bonds if interest rates fall will be:
P1 = $1,140 + C
Solution
• The selling price today of the bonds is the PV of the expected payoffs to the
bondholders. To find the coupon rate, we can set the desired issue price equal to
the present value of the expected value of end of year payoffs, and solve for C.
Doing so, we find:
P0 = $1,000 = [.60(C + C/.10) + .40($1,140 + C)]/1.09
C = $90.57
• So the coupon rate necessary to sell the bonds at par value will be:
Coupon rate = $90.57/$1,000
Coupon rate = .0906, or 9.06%
Solution
• a. The price of the bond today is the present value of the expected price in one year.
So, the price of the bond in one year if interest rates increase will be:
P1 = $58 + $58/.07
P1 = $886.57
• If interest rates fall, the price of the bond in one year will be:
P1 = $58 + $58/.04
P1 = $1,508.00
• Now, we can find the price of the bond today, which will be:
P0 = [.35($886.57) + .65($1,508.00)]/1.058
P0 = $1,219.75
Solution
• If interest rates rise, the price of the bonds will fall. If the price of the bonds is low,
the company will not call them. The firm would be foolish to pay the call price for
something worth less than the call price. In this case, the bondholders will receive the
coupon payment, C, plus the present value of the remaining payments. So, if interest
rates rise, the price of the bonds in one year will be:
P1 = C + C/.07
• If interest rates fall, the assumption is that the bonds will be called. In this case, the
bondholders will receive the call price, plus the coupon payment, C. The call
premium is not fixed, but it is the same as the coupon rate, so the price of the bonds if
interest rates fall will be:
P1 = ($1,000 + C) + C
P1 = $1,000 + 2C
Solution
• The selling price today of the bonds is the PV of the expected payoffs to the
bondholders. To find the coupon rate, we can set the desired issue price equal to the
present value of the expected value of end of year payoffs, and solve for C. Doing so,
we find:
P0 = $1,000 = [.35(C + C/.07) + .65($1,000 + 2C)]/1.058
C = $61.35
• So the coupon rate necessary to sell the bonds at par value will be:
Coupon rate = $61.35/$1,000
Coupon rate = .0614, or 6.14%
 Solution
• c. To the company, the value of the call provision will be given by the difference
between the value of an outstanding, noncallable bond and the call provision. So, the
value of a noncallable bond with the same coupon rate would be:
Noncallable bond value = $61.35/.04
Noncallable bond value = $1,533.83
• So, the value of the call provision to the company is:
Value = .65($1,533.83 – 1,061.35)/1.058
Value = $290.28
Note:
When interest rate increases to 7% after one year, the call provision does not have any value (value=0).
When interest rate decreases to 4% after one year , without the call provision if the company wants to buy back the
bond, it has to buy at the market rate, which is $61.35/4%=$1,533.83; with the call provision the company can buy back
the bond at call price ($1,061.35). Therefore, the value of the call provision is ($1533.83-$1061.35) after one year under
this scenario.
Take the two scenarios together, the value of the call provision = [0.35 x 0 + 0.65 ($1533.83-$1061.35)]/1.058