Williams Inc. just issued 9% convertible bonds that mature in 30 years and can b

Question

Williams Inc. just issued 9% convertible bonds that mature in 30 years and can be converted to 15 common shares. These bonds are priced to sell at par, but vanilla bonds issued by the company would carry a 10.5% coupon. The convertibles have a 5 year call protection window and a 2% call premium. The company plans to force conversion if the conversion value ever exceeds $1200 after the call protection window ends. Williams' common stock currently trades for $50 and the next dividend expected to be paid is $5.25, which will grow at a 6% rate, indefinitely. The company is in the 35% tax bracket. Find the cost of common stock.  

Explanation / Answer

price = dividend next year /(required rate of return - growth rate)

=>

50 = 5.25/(cost of common stock - 6%)

=>

cost of common stock = 5.25/50 + 6%

= 16.5%

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.