Problem 8

Problem VIII The company XY Inc. has convertible bonds on the market. The bonds were issued 3 years ago and their maturity is in 7 years. At the moment of the issue, the required return on these bonds was 12% (compound semi-annually) and they were sold at par. Today, the required return on these bonds is 9% ( m pound semi-annually). The face value is 1000$ and coupons are paid semi-annually XY Inc has also outstanding common shares of which the next semi-annual dividend (in 6 months) will be 1.25$. The growth rate of the dividend is estimated at 7% compound semi- annually) and the required return is 15% (compound semi-annually) a) If the conversion ratio is 30, calculate the strictly debt value, the conversion value and the minimum price of these bonds today. In 6 months, the required return on the bonds is estimated at 11% (compound semi- annually) and the other conditions won't change. Calculate the return for an investor who purchases this bond today and sells it in 6 months b) Problem VIII The company XY Inc. has convertible bonds on the market. The bonds were issued 3 years ago and their maturity is in 7 years. At the moment of the issue, the required return on these bonds was 12% (compound semi-annually) and they were sold at par. Today, the required return on these bonds is 9% ( m pound semi-annually). The face value is 1000$ and coupons are paid semi-annually XY Inc has also outstanding common shares of which the next semi-annual dividend (in 6 months) will be 1.25$. The growth rate of the dividend is estimated at 7% compound semi- annually) and the required return is 15% (compound semi-annually) a) If the conversion ratio is 30, calculate the strictly debt value, the conversion value and the minimum price of these bonds today. In 6 months, the required return on the bonds is estimated at 11% (compound semi- annually) and the other conditions won't change. Calculate the return for an investor who purchases this bond today and sells it in 6 months b)