Assume a $1,000, 20-year convertible bond that has a contractual interest rate of 0.10. Straight debt pays
Question:
Assume a $1,000, 20-year convertible bond that has a contractual interest rate of 0.10. Straight debt pays 0.12. The corporate tax rate is 0.46. The stock price at time of issue is $20. The bond is callable at a price of $1,100 after one year.
(a) If the conversion premium at time of issue is 0.25, the conversion price per share is ______________. The bond is convertible into _______________ shares.
(b) A zero-tax investor will earn more than 0.12 if the bond is called prior to ______________ years.
(c) Assume that a 0.10 bond is convertible into 25 shares of common stock currently selling at $40 per share. The stock is paying a $3-per-share dividend. The bond is being issued at a price of $1,000.
Would you buy the common stock or the convertible bond, assuming you (an individual) are going to buy one or the other? Explain.
Step by Step Answer:
An Introduction To Accounting And Managerial Finance A Merger Of Equals
ISBN: 9789814273824
1st Edition
Authors: Harold JR Bierman