Xilinx, a company in the semiconductor industry, has a $1,000 convertible bond w
ID: 2660566 • Letter: X
Question
Xilinx, a company in the semiconductor industry, has a $1,000 convertible bond with a conversion ratio of 32.076 and a coupon of 3.125%. The bond is currently priced at $751. Xilinx stock trades at $19.25, and pays an annual dividend of $0.56.
a. Find the conversion value of this bond. Explain what this means.
b. Find the conversion premium in dollars and in percent.
c. Find the payback period. Explain what this means in your own words without quoting the definition of payback period. In addition, state whether or not this is considered to be an acceptable payback period.
Explanation / Answer
Given,
For company Xilinx
Convertible bond face value = $1000
Conversion Ratio [i.e. number of stock we receive after conversion of a single bond] = 32.076
Current Price of Bond = $751
Current Stock Price (as traded) of Xilinx = $19.25/share
Annual Dividend of stock = $0.56
Coupon = 3.125% => $31.25 [Since, no frequency given, we assume annual coupon payment]
Please note all calculations rounded upto two decimal places
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Answer a)
If we convert one bond of Xilinx, the resultant number of shares is = conversion ratio = 32.076 ..............[From Given]
Therefore, Value of stocks = Conversion Ratio * Stock Price = 32.076 * 19.25 = $617.46 ..............[From Given]
Annual dividend per share = Conversion Ratio * Annual Dividend per share = 32.076*0.56 = $17.96 ..............[From Given]
Therefore, total value after conversion = $617.46 + $17.96 = $635.42 ------------(i)
Conversion value of bond is defined as the financial worth of the securities obtained by exchanging a convertible security for its underlying bond,
Therefore, Conversion value of this bond = $635.42 ------------[Answer] ....[From (i)]
It means that when you convert the bond, the resultant securities which you get will be worth the conversion value, that is your value of investment will change to conversion value of bond from the price of bond
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Answer b)
Conversion Premium = Price of Bond - Conversion Value .....................[Formula]
From answer of part a) and given, we have,
Conversion Premium = $751 - $635.42 = $115.58 ------------------[Answer]
Conversion Premium Percent = (115.58/751)* 100 = 15.39% ------------------[Answer]
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Answer c)
The payback period for a treasury bond equals the amount of time it will take to earn interest equal to the price of the bond.
i.e total number of times you need to earn the coupon to recover the price of the bond without considering the time value of money
Payback Period = Current Price/Coupon = 751/31.25 = 24.032 years ------------------[Answer] ... [From Given]
It is not an acceptable payback period since it is very high.
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