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Your company needs funds for expansion and decides to issue a 5-year convertible bond. The stock price currently is $40 and your banker recommends a
Your company needs funds for expansion and decides to issue a 5-year convertible bond. The stock price currently is $40 and your banker recommends a 25% conversion premium over the current stock price. Using option models the total option value of the convertible is found to be $89.83 per $1,000 face amount of bond. The companys current cost of regular 5-year debt is 4%, assuming semi-annual interest payments. The stock does not pay a dividend.
- How many shares will each $1,000 bond convert?
- 25
- 40
- 20
- 100
- What is the exercise or conversion price of each option of stock embedded in the convertible?
- $25
- $40
- $48
- $50
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