Suppose you just bought a convertible bond at its par value. Your broker gives you information on
Question:
a. How could you use this information, to determine how much you are paying for the option to convert?
b. How would you determine the expected rate of return on the convertible, along with the expected return on the common stock and the straight bonds?
c. Now suppose the company unexpectedly announced
(1) An increase in its target dividend payout ratio from, say, 25% to 75% and
(2) An increase in the dividend from $1 to $3 to conform to the new policy. Would the new dividend policy help or hurt you and other holders of the convertible bond? Explain.
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... Broker
A broker is someone or something that acts as an intermediary third party, managing transactions between two other entities. A broker is a person or company authorized to buy and sell stocks or other investments. They are the ones responsible for... 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... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...
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Step by Step Answer:
See the BOC model for an illustration of Question 5 We present below verbal answers a We would first use the information to find the value of the bond ...View the full answer
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