Consider the following hypothetical convertible bond: Par Value = $1,000 Coupon
ID: 2754543 • Letter: C
Question
Consider the following hypothetical convertible bond:
Par Value = $1,000
Coupon Rate = 9.5%
Market Price of convertible bond = $1,000
Conversion ratio = 37.383
Estimated straight value of bond = $510
Yield to maturity of the straight bond = 18.7%
Assume that the price of the common stock is $23 and that the dividend per share is $0.75 per year.
Calculate each of the following:
Conversion value
Market conversion price
Conversion premium per share
Conversion premium ratio
Premium over straight value
Premium payback period
Explanation / Answer
a)
Conversion Value = Conversion Ratio x Common stock price
= 37.383 x 23
= $859.809
b)
Market Conversion price = Market Price of Convertible bond / Conversion ratio
= 1000 / 37.383
= $26.75
A conversion premium is expressed as a dollar amount and represents the difference between the price of the convertible and the greater of the conversion or straight-bond value.
c)
Conversion Premium = Price of the bond - Conversion Value
= 1000 - 859.809
= $140.191
d)
Coversion premium ratio = Conversion Value / Price of the bond
= 859.809/ 1000
= 0.859809
e)
Premium over straight bond value = Price of bond - Straight Value of Bond
= 1000 - 510
= $490
f)
fav income per share = [coupon interest - (conv ratio * dividend per share)] / conv ratio
= [95 - (0.86 x 0.75)] / 0.86
= 109.72
premium payback period = market conversion premium / favourable income difference per share
= 140.191 / 109.72
= 1.28 years
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.