The Maritime Engineering Corp. sold 1,500 convertible bonds two years ago at their $1,000 par value. The

Question:

The Maritime Engineering Corp. sold 1,500 convertible bonds two years ago at their $1,000 par value. The 20-year bonds carried a coupon rate of 8% and were convertible into stock at $20 per share. At the time, the firm’s stock was selling for $15, and similar bonds without a conversion feature were yielding 10%. Maritime’s stock is now selling for $25. The firm does not pay dividends.

a. Calculate the return on investment from buying the bond when it was issued, exercising the conversion today, and immediately selling the stock received.

b. What would the return on an investment in Maritime’s stock have been?

c. What was the conversion premium of the bond at the time it was issued?

d. Last year Maritime had net income (EAT) of $4.5 million and 3 million shares outstanding. The company’s marginal tax rate was 34%. Compute Maritime’s basic and diluted EPS.

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...