Question
A bit in the weeds on this one, I need to understand the forumlas used to derive the answers, not just the answer to the
A bit in the weeds on this one, I need to understand the forumlas used to derive the answers, not just the answer to the question.
Dash Incorporated has the following convertible bond outstanding: Coupon5% Principal$1,000 Maturity12 years Conversion price$33.34 Conversion ratio30 shares Call price$1,000 + one years interest The bonds credit rating is BB, and comparable BB-rated bonds yield 9 percent. The firms stock is selling for $25 and pays a dividend of $0.50 a share. The convertible bond is selling for $1,000. a)What is the premium paid over the bonds value as debt? What justifies this premium? b)Given the bonds income advantage, how long must the investor hold the bond to overcome the premium over the bonds value as stock? c)If the price of the stock were to decline by 50 percent, what is the worst performance that the bond should experience and why? d)If after four years the price of the stock has risen to $40, what is the minimum percentage increase in the bonds price? e)If the company pays a 20 percent stock dividend (i.e., not as cash dividend), what impact will that payment have on the price of the convertible bond? f)If the bond is not converted, what does the investor receive when the bond matures? What is the annual return on the investment? g)Is there any reason to expect that the firm will currently call the bond? h)If the price doubles and if the bond is called and investors do not convert, what do they receive
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