Faversham Fish Farm has outstanding a 7.75 percent, 20-year convertible debenture issue. Each $1,000 debenture is convertible

Question:

Faversham Fish Farm has outstanding a 7.75 percent, 20-year convertible debenture issue. Each $1,000 debenture is convertible into 25 shares of common stock. The company also has a straight debt issue outstanding of the same approximate maturity, so it is an easy matter to determine the straight bond value of the convertible issue. The market price of Faversham is volatile. Over the last year, the following was observed:

a. Compute the premium overconversion value (in dollars) and the premium over straight bond value for each of the observations,
b. Compare the two premiums either visually or by graph. What do the relationships tell you with respect to the valuation of the convertible debenture?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...