Company F is considering the terms of a convertible bond that it is going to issue. The following facts apply:

The bond issue size is $10 million. The bonds will have a maturity of 10 years and will be noncallable. The tax rate is 0.46. The stock price is $50.

a. How many shares would the bonds be convertible into with the 0.15 premium?

b. How many shares would the bonds be convertibles into with the 0.20 premium?

c. With the 0.20 conversion premium, there is an extra after-tax cost of $________________ per year.

d. What does the price of the common stock have to be at time 10 for alternative 2 to be preferred? Assume the firm has an opportunity cost of money of 0.10.

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Alternative Interest Conversion Premium 1 2 0.08 0.09 0.15 0.20