A Firm Has Both a Convertible Bond and a Convertible

question 47

Essay

A firm has both a convertible bond and a convertible preferred stock outstanding. The convertible bond has the following features:
      Coupon         6.5%
      Maturity date   10 years
      Exercise price $20
      Principal   $1,000
      Call price  $1,065
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The convertible preferred stock has the following features:
      Annual dividend    $2.25
      Convertible into 2.5 shares of common stock
      Callable at $25 a share
​
Currently the common stock is selling for $13; the yield on non-convertible bonds is 10%, and the yield on comparable preferred stocks is 14%. What is the value of the above securities in terms of the common stock? What would be the value of each security if it lacked the conversion feature?

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Definitions:

Material Requirements Planning

An inventory management system that determines the quantity and timing of raw materials needed for production to meet demand while minimizing stock levels.

Time And Motion Studies

The analysis of work processes to increase efficiency by reducing wasted time and motion.

Interchangeable Parts

Components that are, for practical purposes, identical. They are made to specifications that ensure they are so nearly identical that they will fit into any device of the same type.

Operations Management

The aspect of management dedicated to the design, administration, and supervision of the manufacturing process, along with the modification of business operations in the generation of products or services.