The following data apply to Saunders Corporation’s convertible bonds. Maturity i

Question

The following data apply to Saunders Corporation’s convertible bonds.

Maturity in years: 10                 Current stock price: $30.00

Par value: $1,000.00                  Conversion price:      $35.00

Annual coupon: 5.00%               Straight-debt yield:    8.00%

a. What is the bond’s conversion ratio?

b. What is the bond’s conversion value?

c. What is the bond’s straight-debt value?

d. Based on your answers to the three preceding questions, what is the minimum price (or “floor” price) at which the Saunders’ bonds should sell?

Show work please

Explanation / Answer

Conversion ratio= Par value/ Conversion price so,1000/35=29 so no. of share will be 29 Value of convertible bond= 29*30=870 Calculation of bond straight -debt value Bond value= Interest/(1+r)^1+interest/(1+r)^2---+Interest/(1+r)^10+1000/(1+r)^10 Where Interest= 50 R=8% No of year=10 so bond value = 799 Floor value is lowest of convertible bond and non convertible bond' so floor value= 799

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