Manpower Electric Company has 7 percent convertible bonds outstanding. Each bond has a $1,000 par value. The
Question:
Manpower Electric Company has 7 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 25, the stock price is $38, and the bonds mature in 16 years.
a. What is the conversion value of the bond?
b. Assume that after one year the common share price falls to $27.50. What is the conversion value of the bond?
c. Also, assume that after one year interest rates go up to 10 percent on similar bond. There are 15 years left to maturity. What is the pure value of the bond?Use semiannual analysis.
d. Will the conversion value of the bond (part b) or the pure value of the bond (part c) have a stronger influence on its price in the market?
Step by Step Answer:
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta