I NEED THE EXCEL FUNCTION - NOT ONLY THE ANSWER. I NEED TO UNDERSTAND HOW TO GET THE ANSWER IN EXCEL, THE FORMULA IS NEEDED WITH AN EXAMPLE. THANK YOU!

6 7 Maggie's Magazines (MM) has straight nonconvertible bond that currently yield 9%. MM's stock sells for $22 per share, has an 8 expected constant growth rate of 6%, and has a dividend yield of 4$. MM plans on issuing convertible bonds that will have a 9 $1,000 par value, a coupon rate of 8%, a 20-year maturity, and a conversion ratio of 32 (1.e., each bond could be convertible into 10 32 shares of stock). Coupon payments will be made annually. The bonds will be noncallable for 5 years, after which they will be 11 callable at a price of $1,090; this call price would decline by $6 per year in Year 6 and each year thereafter. For simplicity, assume 12 that the bonds may be called or converted only at the end of a year, immediately after the coupon and dividend payments. 13 Management will call the bonds when the bonds' conversion value exceeds 25% of the bonds' par value (not their call price). 14 15 16 Inputs: 17 Straight bond yield 7% 18 Current stock price $22.00 19 Expected growth rate in stock price 7% 20 Dividend yield 4% 21 Par value (and issue price) of convertible bond $1,000.00 22 Coupon rate on convertible bond 6.00% 23 Maturity of convertible bond (years) 20 24 Conversion ratio 32 25 Call protection period (years) 5 26 Call price when call protection ends $1,090.00 27 Call price decline per year after protection period $6.00 Policy for call: Call when conversion value exceeds this 28 percent over bond's par value. 25% 29 31 a. For each year, calculate: (1) the anticipated stock price; (2) the anticipated conversion value; (3) the anticipated straight-bond 32 price; and (4) the cash flow to the investor assuming conversion occurs. At what year do you expect the bonds will be forced into 33 conversion with a call? What is the bond's value in conversion when it is converted at this time? What is the cash flow to the 34 bondholder when it is converted at this time (Hint: the cash flow includes the conversion value and the coupon payment, because 35 the conversion is immediately after the coupon is paid.) 36 37 Will call the issue in the first year that the conversion 38 Anticipated Straight debt Cash flow to stock price Conversion value of bondholder if at year end Value Convert? (Yes, convertible converted 39 Year (1) (2) no, or already) (3) (4) 22.00 No 42 No 3 No No 45 No 40 41 0 1 2 43 44 4 5 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 0 62 63 Conversion year 64 65 Value in conversion 66 67 b. What is the expected rate of return (.e., before-tax component cost) on the proposed convertible Issue? 68 69 Using the RATE function: 70 N= 71 PMT = $60.00 72 PV = $1,000.00 73 FV = $ 74 75 Rate 76 77 As a check, using the IRR function and the cash flows in column F: 79 Expected return to bondholders 80 81 c. Assume that the convertible bondholders require a 9% rate of return. If the coupon rate remains unchanged, 82 then what conversion ratio will give a bond price of $1000? 83 84 Expected return required by convertible bondholders 9% 85 86 Hint: Use Goal seek to set the difference between the convertible bondholders' current return and the target return 87 to zero by changing the input cell for the conversion ratio, 88 89 Current difference between bondholders' current expected return and target return 90 (multiplied by 1000) = 91 92 Conversion ratio (given original convertible coupon rate) that produces the required 93 yield (Note: after using Goal Seek, cut and paste the conversion ratio into the yellow 94 cell): 78