Zheng Sen's Pen Company Has an Outstanding Issue of Convertible

question 88

Essay

Zheng Sen's Pen Company has an outstanding issue of convertible bonds with a $1,000 par value. These bonds are convertible into 50 shares of common stock. They have a 10 percent coupon and a 10-year maturity. The interest rate on a straight bond of similar risk is 8 percent.
(a) Calculate the straight bond value of the bond.
(b) Calculate the conversion value of the bond when the market price of the stock is $30/share.
(c) What is the least you would expect the bond to sell for at a market price of common stock of $18/share?

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Definitions:

Markup Percent

The percentage increase over the cost price of a product to calculate the selling price.

Selling Price

The actual price at which a product or service is sold to the customer.

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Portable Gas Stove

A compact and transportable cooking device that uses gas fuel for outdoor or emergency cooking.