Question: Phobis Co has in issue 9% bonds, which are redeemable at their nominal value of $100 in five years time. Alternatively, each bond may be

Phobis Co has in issue 9% bonds, which are redeemable at their nominal value of $100 in five years time. Alternatively, each bond may be converted on that date into 20 ordinary shares of the company. The current ordinary share price of Phobis Co is $4.45 and this is expected to grow at a rate of 6.5% per year for the foreseeable future. Phobis Co has a cost of debt of 7% per year.

Required:

Calculate the following current values for each $100 convertible bond: (i) market value

(ii) floor value

(iii) conversion premium.

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