Fifteen years ago, Roop Industries sold $400 million of convertible bonds. The bonds had a 40-year maturity, a 5.75% coupon rate, and paid interest annually. They were sold at their $1,000 par value. The conversion price was set at $62.75, and the Chapter 19: Hybrid Financing: Preferred Stock, Warrants, and Convertibles 781 common stock price was $55 per share. The bonds were subordinated debentures and were given an A rating; straight nonconvertible debentures of the same quality yielded about 8.75% at the time Roop’s bonds were issued.

a. Calculate the premium on the bonds—that is, the percentage excess of the conversion price over the stock price at the time of issue.

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b. What is Roop’s annual before-tax interest savings on the convertible issue versus a straight-debt issue?

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c. At the time the bonds were issued, what was the value per bond of the conversion feature?

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d. Suppose the price of Roop’s common stock fell from $55 on the day the bonds were issued to $32.75 now, 15 years after the issue date (also assume the stock price never exceeded $62.75). Assume interest rates remained constant. What is the current price of the straight-bond portion of the convertible bond? What is the current value if a bondholder converts a bond? Do you think it is likely that the bonds will be converted?

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e. The bonds originally sold for $1,000. If interest rates on A-rated bonds had remained constant at 8.75% and if the stock price had fallen to $32.75, then what do you think would have happened to the price of the convertible bonds? (Assume no change in the standard deviation of stock returns.)

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f. Now suppose that the price of Roop’s common stock had fallen from $55 on the day the bonds were issued to $32.75 at present, 15 years after the issue.