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 29 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 $36 and is expected to grow 4.6% each year What is the conversion value of each convertible bond at Year 8?

Explanation / Answer

Value of share at year 8 = 36*(1+4.6%)^8

Value of share at year 8 = $ 51.59

No of share issue per bond = 29

conversion value of each convertible bond at Year 8 = Max { call Value, Share value}

conversion value of each convertible bond at Year 8 = max{ 1050, (29*51.59)}

conversion value of each convertible bond at Year 8 = $ 1496.11

Answer

conversion value of each convertible bond at Year 8 = $ 1496.11

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