Atlas Anglers Inc. is considering issuing a 15-year convertible bond that will b
ID: 2702537 • Letter: A
Question
Atlas Anglers Inc. is considering issuing a 15-year convertible bond that will be priced at its $1,000 par value. The bonds have a 6.5% annual coupon rate, and each bond can be converted into 20 shares of common stock. The stock currently sells at $30 a share, has an expected dividend in the coming year of $3, and has an expected constant growth rate of 5.5%. What is the estimated floor price of the convertible at the end of Year 3 if the required rate of return on a similar straight-debt issue is 9.5%? a. $830.01 b. $790.48 c. $871.51 d. $915.08 e. $960.84
Atlas Anglers Inc. is considering issuing a 15-year convertible bond that will be priced at its $1,000 par value. The bonds have a 6.5% annual coupon rate, and each bond can be converted into 20 shares of common stock. The stock currently sells at $30 a share, has an expected dividend in the coming year of $3, and has an expected constant growth rate of 5.5%. What is the estimated floor price of the convertible at the end of Year 3 if the required rate of return on a similar straight-debt issue is 9.5%? a. $830.01 b. $790.48 c. $871.51 d. $915.08 e. $960.84
Explanation / Answer
price of bond = 65*PVIFA(9.5,12)+1000 * PVIF(9.5% , 12) = 65 * 6.9838 + 1000 * 0.3365 = 790.48
conversion value = 20 * 30 * 1.055^3 = 704.544
since the price of bond is greater than conversion value
the floor price is 790.48
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