Consider an optionally fully convertible debenture with face value of Rs. 100 and an annual coupon of 9%, which is currently trading at Rs. 133. Each debenture is convertible into four equity shares. The conversion option is exercisable by the debenture holders one year from today. In case the conversion option is not exercised, the debentures will be redeemed one year after the conversion date. The next coupon is due just before the option exercise date. Non-convertible debentures with similar maturity issued by the company are trading with a yield of 8% p.a. and are expected to trade with the same yield one year from today. 1. What is the current value of the conversion option embedded in each debenture? ii. For a rational investor to exercise the conversion option, what should be the minimum

market price per share one year from today