1. Assume the following convertible bond data: We have a 20-year, 10.5% annual coupon, callable convertible bond with 5 years of call protection and $1,100 call price, selling at its $1,000 par value. A straight debt issue would require a 12% coupon. Bond will be called at the issue date anniversary if the conversion value is greater than $1,200. Firms last dividends paid was $1.48, and its constant growth rate is 8% per year. Stock price is now $20. The bond can be converted into 40 shares. Firms tax rate is 40%.

2. What is the requirement for the cost of the convertible to be consistent with the cost of debt and cost of equity?