Craigs Cake Company has an outstanding issue of 15-year convertible bonds with a $1,000 par value. These

Question:

Craig’s Cake Company has an outstanding issue of 15-year convertible bonds with a $1,000 par value. These bonds are convertible into 80 shares of common stock. They have a 13% annual coupon interest rate, whereas the interest rate on straight bonds of similar risk is 16%.

a. Calculate the straight bond value of this bond.

b. Calculate the conversion (or stock) value of the bond when the market price is $9, $12, $13, $15, and $20 per share of common stock.

c. For each of the common stock prices given in part b, at what price would you expect the bond to sell? Why?

d. Graph the straight value and conversion value of the bond for each common stock price given. Plot the per-share common stock prices on the x axis and the bond values on the y axis. Use this graph to indicate the minimum market value of the bond associated with each common stock price.

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... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...