In: Finance
Answer:
a) Bond's conversion value = Conversion ratio * Market price of
the stock
i.e.Bond's conversion value = 38 * 23.12 = $878.56
b) Premium over conversion = Market conversion price - Market
price of the stock
i.e.Premium over conversion = (1095/38) - 23.12 = 28.82 - 23.12 =
$5.70
c) Investment value (straight value of bond) = coupon rate PVAF
(9%, 18) + redemption value PVIF (9%, 18)
= 93.50 PVAF(9%,18) + 1000 PVIF (9%,18) = 818.65 + 211.99 =
$1030.64
d) Premium over investment value = Market Price of debenture -
Investment Value = $(1095-1030.64) = $64.36
OR (64.36/1030.64)*100 = 6.24%
Favourable income differential per share = [Coupon interest -
(Conversion ratio * dividend per share)] / Conversion ratio
Favourable income differential per share = [93.50 - (38*0.50)] / 38
= 1.96
Therefore, premium payback period = Conversion premium /
Favourable income differential per share
i.e. premium payback period = 5.70 / 1.96 = 2.91 years