Question

1. A 9.35%, 18-year convertible bond is selling at $1,195. The bond has a conversion rate of 38. The common stock is trading at 23.12. Comparable straight bonds are selling to yield 9 %. The common stock pays an annual dividend of 35 cents per share. Calculate the bond’s conversion value, premium (if any) over conversion value, investment value, and premium(if any) over investment value, and payback period.

Answer 1

Given in the question

18 year convertible bond @9.35% = $1,195

Conversion rate of bond = 38 share per bond

Dividend per share = 35% per share

Now,

Conversion Value = Conversion Rate * Trading Price of Stock = 38 * 23.12 = $878.56

Premium Over Conversion = Convertible Value of Bond - Conversion Value = 1195 - 878.56 = 316.44

Investment Value will be same as convertible bond price = $1,195

Payback Value Per Year = Dividend per share * Conversion Value = 35% * 878.56 = $307.496

So $ 307.496 is the Payback Value for 1 year thus payback value for 1 month will be = 307.496 / 12 = 25.62

Therefore Payback Value for 3 year will be = 3 * 307.496 = 922.488

Remaining 1195 - 922.488 = 272.512 will be paidback in 10 months and 15 days

Therefore PayBack Period of Investment = 3 years 10 months and 15 days