Jackson Electronics (40% Marginal Tax Rate) Is Considering Issuing Convertible

question 38

Multiple Choice

Jackson Electronics (40% marginal tax rate) is considering issuing convertible debentures.Its investment banker tentatively has agreed to issue a 9.0 percent, 20-year convertible debenture ($1,000 par value) .The conversion price will be $50 a share.Jackson's financial managers only want to issue the convertible if its after-tax component cost of capital is less than or equal to 8.0 percent.Otherwise, they plan to issue non-convertible debt.Jackson's current common stock price is $43 a share.The company expects to call the convertible issue 5 years from now when the common stock price is expected to be $60 a share.Under the conditions given in this problem, what is the minimum price per debenture that Jackson can receive and keep the after-tax cost of capital for the debentures at 8.0%?

• A)about $1,033
• B)about $946
• C)about $897
• D)$1,200

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