Consider the case of Cheung Zap Inc.:

Cheung Zap Inc. just issued 13-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 Cheungs common stock at a conversion price of $51.84.

Cheungs convertible bonds pay a 6.48% annual coupon, but if Cheung had issued straight-debt bonds (no conversion), it would have had to pay 10.80% annual interest.

Based on the information available, complete the table:

	Value
Conversion ratio of Cheungs bond issue:
Straight-debt value of this convertible debt issue:	per bond
Value of the convertible option:	per bond

Cheungs common stock currently sells for $32 per share. Would an investor want to convert the bonds now?

Yes

No

Suppose analysts expect Cheung to pay a dividend of $4.00 per share at the end of the year and for the dividend to grow at a constant rate of 2.5% per year. What is the expected conversion value five years from now?

$1,047.74 per share

$523.87 per share

$698.49 per share

$1,877.13 per share