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Manpower Electric Company has 6 percent convertible bonds outstanding. Each bond has a $1,000 par value....

Manpower Electric Company has 6 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 20, the stock price $37, and the bonds mature in 11 years. Use Appendix B and Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods.


a. What is the conversion value of the bond? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

CONVERSION VALUE ________

b. Assume after one year that the common stock price falls to $30.00. What is the conversion value of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)


CONVERSION VALUE ________

c. Also assume that after one year interest rates go up to 10 percent on similar bonds. There are 10 years left to maturity. What is the pure value of the bond? Use semiannual analysis. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

PURE VALUE OF THE BOND ____________

d. Will the conversion value of the bond (part b) or the pure value of the bond (part c) have a stronger influence on its price in the market?

  • Conversion value of the bond

  • Pure value of the bond

e. If the bond trades in the market at its pure bond value, what would be the conversion premium (stated as a percentage of the conversion value)? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

CONVERSION PREMIUM PERCENTAGE ________%

Solutions

Expert Solution

a.

Conversion Value = Conversion Ratio*Current Stock Price

=20*$37 = $740

b.

Stock Price after 1 year = $30

Conversion Value after 1 year = 20*$30 = $600

c.

d.

The pure value will influence the prices more, because the bonds will be bought and sold in the market at that price.

e.

Based on Part d

Pure Value = $750.76

Conversion value after 1 year = $600

Value after 1 year is taken because the pure value of bond is available on that date.

Premium = Pure Value - Conversion Value

= 750.76 - 600 = $150.76

jeff jeffy answered 4 months ago
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