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