2 DECIMALS PLEASE thank you You have been hired to value a new 30-year callable,

Question

2 DECIMALS PLEASE thank you

You have been hired to value a new 30-year callable, convertible bond. The bond has a coupon rate of 5.6 percent, payable annually. The conversion price is $98, and the stock currently sells for $40.10. The stock price is expected to grow at 12 percent per year. The bond is callable at $1,400, but based on prior experience, it won't be called unless the conversion value is $1,500. The required return on this bond is 9 percent.

What value would you assign to this bond? (Do not round intermediate calculations and round your answer to 2 decimal places., e.g., 32.16.)

What value would you assign to this bond? (Do not round intermediate calculations and round your answer to 2 decimal places., e.g., 32.16.)

Explanation / Answer

Minimum bond price is the greater of straight bond value or the conversion value.

Straight bond Value of bond = Interest*PVIFA(9%,30) + redemption value*PVIF(9%,30)

Here interest = 1000*5.6% = 56

Redemption is assumed to be at par

=1000*5.6% *10.27365 + 1000*0.075371

=575.3246 + 75.37114

=650.6958$

Conversion ratio is Par value / conversion price

=1000/98

=10.20408

Conversion price = Conversion ratio * stock price

=10.20408*40.1

=409.1837$

Thus minimum price of bond is 650.6958$

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