Question
What if convertible bonds are issued? Suppose a 20 year 8.5% annual coupon, callable bond is issued for the face value of $1000 whereas a
What if convertible bonds are issued? Suppose a 20 year 8.5% annual coupon, callable bond is issued for the face value of $1000 whereas a straight debt issue would require a 10% coupon. The convertible bonds would be call protected for 5 years, the call price would be $1100, and the company would probably call the bonds as soon as possible after the conversion value exceeds $1200. Note though the call would be on an issue date anniversary. The current stock price is $20, the last dividend was $1 and the dividend is expected to grow at a constant 8% rate. Each convertible bond would convert into 40 common shares at the owners option.
- What conversion price is built into this bond?
- What is the convertibles straight debt value? What is the implied value of the convertibility feature?
- What is the bonds expected conversion value at year 0, and at year 10?
- What is the expected cost of capital for the convertible to this company? Is this cost consistent with the riskiness of the issue?
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