Carpet Inc. is considering issuing a 10-year, 8.5% convertible bond. Each bond could be converted into 20 shares of common stock. The conversion price would be set at 18% premium. Currently, Carpet Inc. stock price is equal to $42 per share and it is expected to pay $3 dividends in the coming year. Also, the expected constant growth rate of the stock is 5.5%.

1. What is Carpet Inc.s conversion price of its convertible bonds? *

a. $49.56

b. $50.00

c. $44.31

d. $43.26

e. None of the above

2. What is the conversion value at t=5? *

a. $973.79

b. $1,295.46

c. $1,097.85

d. $1,921.72

e. None of the above