Question
Consider the case of Cheung Zap Inc.: Cheung Zap Inc. just issued 11-year convertible bonds at a par value of $1,000. At any time before
Consider the case of Cheung Zap Inc.: Cheung Zap Inc. just issued 11-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 $64.32. Cheungs convertible bonds pay a 8.04% annual coupon, but if Cheung had issued straight-debt bonds (no conversion), it would have had to pay 13.40% annual interest.
Based on the information available, complete the table:
A. Conversion ratio of Cheungs bond issue:15.55/ 18.66/ 10.89/ 15.24
B. Straight-debt value of this convertible debt issue: 980.42/ 1200/ 700.30/ 449.54 per bond
C. Value of the convertible option: 19.58/ -200/ 299.70/ 550.46 per bond
D. Cheungs common stock currently sells for $28 per share. Would an investor want to convert the bonds now?:
Yes/No
E. Suppose analysts expect Cheung to pay a dividend of $4.50 per share at the end of the year and for the dividend to grow at a constant rate of 4% per year. What is the expected conversion value five years from now?:
a. $2,191.38 per share
b. $397.34 per share
c. $794.69 per share
d. $529.79 per share
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