Valdes Enterprises is considering issuing a 10-year convertible bond that would

Question

Valdes Enterprises is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value. The bonds would have an 8.00% annual coupon, and each bond could be converted into 20 shares of common stock. The required rate of return on an otherwise similar nonconvertible bond is 10.00%. The stock currently sells for $40.00 a share, has an expected dividend in the coming year of $2.00, and has an expected constant growth rate of 5.00%. What is the estimated floor price of the convertible at the end of Year 3?

Explanation / Answer

principal amount is $1,000 and the discounting rate is 10% Price = 80 X PVIFA (7,10%) + 1,000 X PVIF (7,10%) Price = 80 X 4.684 + 1,000 X 0.5132 Price = $902.63 Hope this helps

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