Cannon Manufacturing Is Considering Issuing 18-Year,7

question 24

Multiple Choice

Cannon Manufacturing is considering issuing 18-year,7.8% annual coupon,$1,000 face value convertible bonds at a price of $1,000 each.Each bond would be convertible into 22 shares of common stock.If the bonds were not convertible,investors would require an annual yield of 11.8%.The stock's current price is $22.00,its expected dividend is $2.60,and its expected growth rate is 5.9%.The bonds are noncallable for 10 years.What is the bond's conversion value in Year 5? Do not round your intermediate calculations.

• A) $709.12
• B) $773.58
• C) $644.65
• D) $547.95
• E) $676.88

---

Definitions:

Benchmark Risk

The risk that a portfolio's performance deviates from its benchmark index.

Portfolio Difference

The distinct variations and diversifications in an investment portfolio that aim at minimizing risk and maximizing returns.

Alpha

A measure of investment performance on a risk-adjusted basis, representing the excess return of an investment relative to the return of a benchmark index.

Stock

A type of security that signifies ownership in a corporation and represents a claim on part of the company's assets and earnings.