Please help with answering the following question and please show work? Fifteen

Question

Please help with answering the following question and please show work?


Fifteen years ago, Roop Industries sold $400 millions of convertible bonds. The bonds had a 40 year maturity, a 5.75 % coupon rate, and paid interest annually. They were sold at their $1,000 par value. The conversion price was set at $62.75; the common stock price was $55 per share. The bonds were subordinated debentures, and they were given an A rating; straight nonconvertible debentures of the same qualify yielded about 8.75% at the time Roop's bonds were issued.

a- Calculate the premium on the bonds, that is, the percentage excess of the conversion price over the stock price.
b- What Roopo's annual before tax interest savings on the convertible issue versus a straight debt issue?
c- At the time the bonds wee issued, what was the value per bond of the conversion feature?
d- Suppose the price of Roop's common stock fell from $55 on the day the bonds were issued to $32.75 now, 15 years after the issue date (also assume that the stock price never exceeded $62.75). Assume interest rates remained constant.
What is the current price of the straight bond portion of the convertible bond?
What is the current value if a bondholder converts a bond? Do you think it is likely that the bonds will be converted?

e- The bonds originally sold for $1,00. If interest rates on A- rated bonds had remained constant at 8.75% and the stock price had fallen to $32.75, what do you think would have happened to the price of the convertible bonds?
(Assume no change in the standard deviation of stock return).

f- Now suppose the price of Roop's common stock had fallen from $55 on the day the bonds were issued to $32.75 at present, 15 years after the issue. Suppose also tha the rate of interest had fallen form 8.75% to 5.75%. Under these conditions, wha is the current price value if a bondholder converts a bond?
What do you think would have happened to the price of the bonds?

Explanation / Answer

a) 14.1% b) $12 million before tax c) d) value as a straight bond = $699.25; value in conversion = $521.91 f) value as a straight bond = $1,000.00; value in conversion = $521.91

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