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Quaid Co.'s common stock sells for $5.54, pays a dividend of $0.49, and has an expected long-term growth rate of 5%. The firm's straight-debt bonds
Quaid Co.'s common stock sells for $5.54, pays a dividend of $0.49, and has an expected long-term growth rate of 5%. The firm's straight-debt bonds yield a 8.5% return. Quaid is planning a convertible bond issue. The convertibles bonds can be redeemed at par in 5 years time, pay a 7% annual coupon, have a par value of $1,000, and a conversion ratio of 180 shares per bond. The bonds will sell for $1,099.5. The tax rate is 20%.
What will be the after-tax costs of the convertible?
a. 6.80%
b. 7.20%
c. 7.79%
d. 8.50%
e. 8.69%
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