The following data apply to Frye Inc.: Frye Inc. needs to raise $30 million for

Question

The following data apply to Frye Inc.:

Frye Inc. needs to raise $30 million for its new project.

Frye Inc. is considering raising the new capital through issuing convertible bonds which will be sold at par, carry a coupon rate of 6% - annually paid, have 20-year maturity, and can be converted into 23 shares of stock.

The bonds would be noncallable for 8 years, after which they would be callable at a price of $1,050.

The firms' straight nonconvertible bonds currently yields 8.5%

Frye Inc.'s stock currently sells for $32 and is expected to grow 4.7% each year

What is the conversion value of each convertible bond at Year 8?

Explanation / Answer

Each share market value at year 8 $        46.21 32*(1+4.7%)^8 Number of shares converted per 1 bond $        23.00 Conversion value of each bond $ 1,062.80

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