Mutchler Corporation plans a $12,000,000 bond issue that has a carrying value of $11,232,125 as of September 1, 2011. For each of the following assumptions, describe cash flows that occur and the impact each scenario would have on Mutchler’s budgeted balance sheet. Consider each scenario an independent event.
A. Mutchler Corporation’s bonds have a call price of 102 and on September 1, 2011, the corporation plans to exercise the call feature on the entire bond issue.
B. Mutchler Corporation’s bonds have a 50-to-1 common stock conversion feature; that is, one bond is convertible into 50 shares of Mutchler Corporation’s common stock. On September 1, 2011, Mutchler predicts that the bondholders will convert 25 percent of the bonds into common stock.