Question: Convertible Calculations Rayne Inc., has a $ 1.000 face value convertible bond issue that is currently selling in the market for $950. Each bond is

Convertible Calculations Rayne Inc., has a $ 1.000 face value convertible bond issue that is currently selling in the market for $950. Each bond is exchangeable at any time for 25 shares of the company’s stock. The convertible bond has a 7 percent coupon payable semiannually. Similar nonconvertible bonds are priced to yield 10 percent. The bond matures in 10 years. Stock in Rayne sells for $36 per share.

a. What are the conversion ratio, conversion price, and conversion premium?

b. What is the straight bond value the conversion value?

c. In part (b), what would the stock price have to be for the conversion value and the straight bond value to be equal?

d. What is the option value of the bond?

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