Problem 1: Springsteen Music Company earned $820 million last year and paid out 20 percent of earnings in dividends.
a. By how much did the company's retained earnings increase?
b. With 100 million shares outstanding and a stock price of $50, what was the dividend yield? (Hint: First compute dividends per share.)
Problem 2: The shares of Dyer Drilling Co. sell for $60. The firm has a P/E ratio of 15. 40% of earnings is paid out in dividends. What is the firm's dividend yield?
Problem 3: Laser Electronics Co. has $30 million in 8% convertible bonds outstanding. The conversion ratio is 50; the stock price is $17; and the bonds matures in 15 years. The bonds are currently selling at a conversion premium of $60 over their conversion value. If the price of the common stock rises to $23 on this date next year, what would your rate of return be if you bought a convertible bond today and sold it in one year? Assume on this date next year, the conversion premium has shrunk from $60 to $10.
Problem 4: Assume you can buy a warrant for $5 that gives you the option to buy one share of common stock at $14 per share. The stock is currently selling at $16 per share.
a. What is the intrinsic value of the warrant?
b. What is the speculative premium on the warrant?
c. If the stock rises to $24 per share and the warrant sells at its theoretical value without a premium, what will be the percentage increase in the stock price and the warrant price if you bought the stock and the warrant at the prices stated above? Explain this relationship.