Question
6. Convertibles Consider the case of Cheung Zap Inc.: Cheung Zap Inc. just issued nine-year convertible bonds at a par value of $1,000. At any
6. Convertibles
Consider the case of Cheung Zap Inc.:
Cheung Zap Inc. just issued nine-year convertible bonds at a par value of $1,000. At any time before maturity, investors have the option to exchange their bonds for shares of Cheung's common stock at a conversion price of $53.76.
Cheung's convertible bonds pay a 6.72% annual coupon, but if Cheung had issued straight-debt bonds (no conversion), it would have had to pay 11.20% annual interest.
QUESTION: Conversion ratio of Cheung's bond issue:
A. 23.32
B. 14.02
C. 18.60
D. 19.63
QUESTION: Straight-debt value of this convertible debt issue:
A. 369.21
B. 753.86
C. 1,200.00
D. 1,055.40
QUESTION: Value of the convertible option:
A. -55.40
B. 246.14
C. -200.00
D. 630.79
QUESTION: Cheung's common stock currently sells for $41 per share. Would an investor want to convert the bonds now?
A. No
B. Yes
QUESTION: Suppose analysts expect Cheung to pay a dividend of $2.50 per share at the end of the year and for the dividend to grow at a constant rate of 4.5% per year. What is the expected conversion value five years from now?
A. $1,425.41 per share
B. $950.27 per share
C. $2,746.60 per share
D. $712.70 per share
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started