Question

Use the following data for Marcus, Inc. to determine the minimum price (or "floor price") at...

Use the following data for Marcus, Inc. to determine the minimum price (or "floor price") at which the company's convertible bonds should sell. Round to the nearest whole dollar.
Maturity: 20 years
Stock price: $40.00
Par value: $1,000
Conversion price: $45
Annual coupon: 8%
Straight debt yield: 10%
$889
$900
$1,125
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None of the above.
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Answer #1

Answer: Given: Maturity = 20 years, stock price = $40, Par value = $1000, Conversion price = $45,               Annual coupon = 8%, Straight debt yield = 10%

Step 1: PV factor: 1 / (1+.10)20 = .1486

1-.1486 = .8514

Step 2: Coupon: 1000*8% = $80

Current bond price = Annual coupon / Straight debt yield

80 / .10 = $800

Step 3: 800 * .8514 = $681.12

PV : 1000 / (1+.10)20 =148.64

Floor price = 681.12 + 148.64

= $829.76 or $830 (Approximation)

None of the above.

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