Bio Corp. has 10,000 shares of convertible bonds, with total face value of $10 million, and...
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Bio Corp. has 10,000 shares of convertible bonds, with total face value of $10 million, and the maturity is 4 years later. One share of convertible bond can be converted at maturity to 50 shares of newly-issued common stock. Right now, Bio Corp. has 4 million common stocks outstanding. The market value of Bio Corp.'s asset is 150 million with an annual volatility of 0.35. Suppose during the next 4 years, Bio Corp.'s capital structure only contains the common stock and the convertible bond. There is neither dividend payment nor coupon payment. The annualized continuously compounded interest rate is 3%. a. Under what circumstances will the bondholder convert the bond to stock? (5 pts) b. What is a fair price for the convertible bond per share now? (10 pts) Bio Corp. has 10,000 shares of convertible bonds, with total face value of $10 million, and the maturity is 4 years later. One share of convertible bond can be converted at maturity to 50 shares of newly-issued common stock. Right now, Bio Corp. has 4 million common stocks outstanding. The market value of Bio Corp.'s asset is 150 million with an annual volatility of 0.35. Suppose during the next 4 years, Bio Corp.'s capital structure only contains the common stock and the convertible bond. There is neither dividend payment nor coupon payment. The annualized continuously compounded interest rate is 3%. a. Under what circumstances will the bondholder convert the bond to stock? (5 pts) b. What is a fair price for the convertible bond per share now? (10 pts)
Expert Answer:
Answer rating: 100% (QA)
a The decision to convert the bond to stock depends on the comparison of the current market value of the bond and the value of the conversion option T... View the full answer
Related Book For
Intermediate Accounting Volume 2
ISBN: 9781119497042
12th Canadian Edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Irene M. Wiecek, Bruce J. McConomy
Posted Date:
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