The ABC Company has been given two choices by an investment banker. One is to issue 5-percent convertible 20-year bonds ($1,000 par). The stock price is now $10 per share, and the conversion premium would be 100 percent. The other alternative would be a 4-percent interest rate and a 25-percent conversion premium.

The bondswould be noncallable. The company does not pay a cash dividend on its stock, and it does not intend to start in the near future.

The company has recently issued 20-year straight debt costing 0.10. The company has a 0.40 tax rate.

Which of the two alternatives should the company prefer? Explain.