A firm has both a convertible bond and a convertible preferred stock outstanding. The convertible bond...

Transcribed Image Text:

A firm has both a convertible bond and a convertible preferred stock outstanding. The convertible bond has the following features: Coupon 6.5% Maturity date 10 years Exercise price $20 Principal $1,000 Call price $1,065 The convertible preferred stock has the following features: Annual dividend $2.25 Convertible into 2.5 shares of common stock Callable at $25 a share Currently the common stock is selling for $13; the yield on non-convertible bonds is 10%, and the yield on comparable preferred stocks is 14%. What is the value of the above securities in terms of the common stock? What would be the value of each security if it lacked the conversion feature? A firm has both a convertible bond and a convertible preferred stock outstanding. The convertible bond has the following features: Coupon 6.5% Maturity date 10 years Exercise price $20 Principal $1,000 Call price $1,065 The convertible preferred stock has the following features: Annual dividend $2.25 Convertible into 2.5 shares of common stock Callable at $25 a share Currently the common stock is selling for $13; the yield on non-convertible bonds is 10%, and the yield on comparable preferred stocks is 14%. What is the value of the above securities in terms of the common stock? What would be the value of each security if it lacked the conversion feature?

Answer rating: 100% (QA)

To determine the value of the convertible bond and convertible preferred stock we need to calculate ... View the full answer