Alicia Inc. has a $100 face value convertible bond issue that is currently selling in the market

Question:

Alicia Inc. has a $100 face value convertible bond issue that is currently selling in the market for $96. Each bond is exchangeable at any time for 20 shares of the company’s stock. The convertible bond has a 6.5 percent coupon, payable semiannually. Similar nonconvertible bonds are priced to yield 9 percent. The bond matures in 20 years. Stock in Alicia sells for $4.5 per share.

a. What are the conversion ratio, conversion price, and conversion premium?

b. What is the straight bond value? The conversion value?

c. In part (b), what would the stock price have to be for the conversion value and the straight bond value to be equal?

d. What is the option value of the bond?

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...

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