Eastern Digital Corp. has a convertible bond outstanding with a coupon rate of 9 percent and a maturity date of 20 years. It is rated Aa, and competitive, nonconvertible bonds of the same risk class carry a 10 percent return. The conversion ratio is 40. Currently the common stock is selling for $18.25 per share on the New York Stock Exchange.
a. What is the conversion price?
b. What is the conversion value?
c. Compute the pure bond value. (Use semiannual analysis.)
d. Draw a graph that includes the floor price and the conversion value but not the convertible bond price. For the stock price on the horizontal axis, use 10, 20, 30, 40, and 50.
e. Which will influence the bond price more—the pure bond value (floor value) or the conversion premium?