XYZ Company\'s convertible bond has 14 years to maturity, face value of $1,000 a
ID: 2617479 • Letter: X
Question
XYZ Company's convertible bond has 14 years to maturity, face value of $1,000 and a coupon rate of 5% paid annually. The bond can be converted into 20 shares of common stock. Currently, similar 14 years to maturity bonds are yielding 9%. XYZ does not distribute dividends. a) Today, XYZ common stock closed at $70 per share. What is the lowest price that this convertible bond could be trading at? b) How would your answer change if today's stock price is $40 per share? Give a numerical answer, not just a direction of change. c) How would your answer change if today's stock price is $30 per share? Give a numerical answer, not just a direction of change. d) What will you do if the corporation calls the convertible bond? Assume the current stock price is $60, and the call price is $1010. XYZ Company's convertible bond has 14 years to maturity, face value of $1,000 and a coupon rate of 5% paid annually. The bond can be converted into 20 shares of common stock. Currently, similar 14 years to maturity bonds are yielding 9%. XYZ does not distribute dividends. a) Today, XYZ common stock closed at $70 per share. What is the lowest price that this convertible bond could be trading at? b) How would your answer change if today's stock price is $40 per share? Give a numerical answer, not just a direction of change. c) How would your answer change if today's stock price is $30 per share? Give a numerical answer, not just a direction of change. d) What will you do if the corporation calls the convertible bond? Assume the current stock price is $60, and the call price is $1010.Explanation / Answer
Soln : a) We are considering here that instead of the bond value received, the bonds will be converted to common stock at given price of $70 per share. Accordingly the calculations are done.
Value of the bond today = $808.25
(b) In case if the price is 40 per share, if it is converted will gve = 20*40 = $800< face valeu of bond , hence not to be converted.
Value of convertible bond = $688.55
(c) Again if the stock price will get change to $30, the value of convertible bond remain same . As it convertible option not being converted.
Value of convertible bond = $688.55
(d) In case if the stck price = $60, then it is beneficial to convert it in common stock and hence the value of convertible bond = $748.40
It is less than call price given by company , hence, we sell the bond to corporation.
Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Coupon 50 50 50 50 50 50 50 50 50 50 50 50 50 50 Value of share in terms of today price 1400 Discount rate @9% 0.92 0.84 0.77 0.71 0.65 0.60 0.55 0.50 0.46 0.42 0.39 0.36 0.33 0.30 PV 45.87 42.08 38.61 35.42 32.50 29.81 27.35 25.09 23.02 21.12 19.38 17.78 16.31 433.91 NPV 808.25Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.