On January 1, 1981, the Huntington Railroad Company issued $100 million of 9 bonds due 2020. Interest

On January 1, 1981, the Huntington Railroad Company issued

$100 million of 9⁵₈ bonds due 2020. Interest is paid semiannually in January and June of each year. These bonds are callable according to the following schedule:

These bonds are also convertible into shares of stock, with each $1,000 face value bond convertible into 15 shares of Huntington common stock. Huntington common stock paid a dividend of $2 per share in 1997. Its dividends are expected to grow at a rate of 10% per year for the years 1998–2002 and then slow to a rate of 5% per year thereafter. The current required rate of return on Huntington common stock is 14%.
The current yield (i.e., annual interest/market price) on the Huntington bonds is 7.5%. Interest rate forecasts for the next six years are as follows:

All indications are that yields will remain at 9% through 2020.

a. Calculate the yield-to-call for the Huntington bonds for each year from today, the end of 1997, to maturity. Plot the yield-to-call against time.

b. Forecast the stock price of Huntington common stock for each year from 1998 through 2020. Plot the predicted stock price against time.

c. Based on the yield and dividend growth forecasts, at what point in the future would it be profitable to convert the Huntington bonds into stock? Explain the basis of your decision. What other factors enter into this decision?

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1990-2000 at 103.0 2001-2005 at 102.0 2006-2010 at 101.0 2011-2015 at 100.5 2016-2020 at 100.0