You have been hired to value a new 20-year callable, convertible bond. The bond has a coupon rate of 5.5 percent, payable annually. The conversion price is $101, and the stock currently sells for $51.10. The stock price is expected to grow at 11 percent per year. The bond is callable at $1,200, but based on prior experience, it won't be called unless the conversion value is $1,300. 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.)
Considering, PAR value / Convertible market value of Bond: $1300
Number of Years: 20
Coupon Value: 0.055 * 1300: $71.5
Interest Rate: 9%
Hence, straight value of the Bond from the formula:
Bond Price: $884.65
Conversion Price: $101
Convertible Price: $1300
Hence: Conversion Ratio: 1300 / 101
Since, current value of the stock: $51.1
Hence, Conversion Value of Bond: 12.87 * 51.1
The minimum value assign to this bond is the straight bond value of $884.65.
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