Valuation- convertible bond you purchased on of AAA Corp.\'s 9%, 15 year convert
ID: 2699051 • Letter: V
Question
Valuation- convertible bond you purchased on of AAA Corp.'s 9%, 15 year convertible bonds at it $1,000 par value a year ago when the company's common stock was selling for $25. similar bonds without a conversion feature returned 10% at the time. the bond is convertible into stock at a price of $35. the stock is now selling for $40. assume no dividends.a) you exercise the conversion feature today and immediately sold the stock you received. calculate the total return on your investment. b) what would your return have been if you had invested $1,000 in AAA's stock instead of the bond?
Explanation / Answer
purchase Price = 90*PVIFA(10,15) + 1000/1.1^15 = 90*7.60+239.39 = 923.39
initially he has invested = 923.39
price of bond now = 90*PVIFA(10,14)+1000/1.1^14
= 90*7.36+ 263.33
= $925.73
no of bond it will receive at this price = 925.73/35 = 26.44
price of one stock = $40
price of 26.44 = 26.44*40 = 1057.6
total return = 1057.6-923.39 = $134.21
b)
if he has invested in stock
he has invested = $923.39
no of stock it could purchase = 923.39/25 = 36.93
total sell price @40 = 40*36.93 = 1477.2
return = 1477.2-923.39 = $553.81 (this is the return if he has invested all in stocks)
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