Xenix Inc. issued $100 million of 10-year zero coupon convertible bonds. For every $1,000 of face value

Question:

Xenix Inc. issued $100 million of 10-year zero coupon convertible bonds. For every $1,000 of face value of the bond, the holder was entitled to 25 shares of the company's common stock. It was determined that a pure bond with maturity and risk profile similar to the convertible bond would have an effective interest of 8%. The proceeds from the issue were $97.4 million.

Required:

Determine (1) the amounts allocated to liability (long-term debt) and shareholders' equity and (2) the discount on the bond. You can ignore tax effects.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...