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Cheung Zap Inc. just issued nine-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 Cheung's common stock at a conversion price of $55.68. Cheung's convertible bonds pay a 6.96 % annual coupon, but if Cheung had issued straight-debt bonds (no conversion), it would have had to pay 11.60% annual interest Based on the information available, complete the table: Value Conversion ratio of Cheung's bond issue: 17.96 Pure-debt value of this convertible debt issue: $748.96 Value of the convertible option: $251.04 Cheung's common stock currently sells for $27 per share. Would an investor want to convert the bonds now? O 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 3.5 % per year. What is the expected conversion value five years from now? $1,785.66 $575.98 $863.97 $431.99 Convertible securities are also used to deal with situations that lead to agency conflict. Consider this situation: Cheung's management was considering to issue new stock, but due to the negative signal that it would send it to its existing stockholders, it decided to issue convertible bonds instead. Because the company knows that the growth likely to be converted into mo hegative signal to the market. prospects are better than what the market perceives, convertible bonds are directly more issue equity by equity. This way, the company can less