Jake Cornwall just bought a $1,000 par value, 8% coupon rate, 30 year bond of the Pristine Corp. Interest rates had risen somewhat between the time the coupon rate was set and the bond was issued, so Jake got it at a discount paying only $950. The bond is convertible into 50 shares of stock at a conversion price of $20 per share. Similar Pristine Corp bonds without the conversion feature carry 10% coupon rates and are also selling at $950. Pristine’s stock is selling at $15 per share. The company consistently pays an annual dividend of $1 per share. Calculate the following at the end of one year.

a. The return on Jake’s investment if the stock’s price rises to $25 per share, Jake exercises the conversion and sells immediately.

b. The one year return on Jake’s investment if he had invested in Pristine’s ordinary bonds (no conversion) and interest rates at the end of the year were the same as they were when he purchased the bond.

c. Jake’s one year return if he had invested in the company’s stock.

d. What would the returns on the three investments have been if the stock’s price hadn’t moved?

e. What would the returns on the three investments have been if the stock’s price had declined to $12 and interest rates were the same as on the day he purchased the bond?

f. What would the return on Jakes investment have been if Pristine had forced conversion at a stock price of $23 a few days before the end of the year?

g. Comment on the effect of the forced conversion on investors.