Consider the case of Cheung Zap Inc.: Cheung Zap Inc. just issued seven-year convertible bonds...
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Finance
Consider the case of Cheung Zap Inc.:
Cheung Zap Inc. just issued seven-year convertible bonds at a par value of $1,000. At any time before maturity, investors have the option to exchange their bonds for shares of Cheungs common stock at a conversion price of $68.16.
Cheungs convertible bonds pay a 8.52% annual coupon, but if Cheung had issued straight-debt bonds (no conversion), it would have had to pay 14.20% annual interest.
Based on the information available, complete the table:
Value
Conversion ratio of Cheungs bond issue:
Straight-debt value of this convertible debt issue:
per bond
Value of the convertible option:
per bond
Cheungs common stock currently sells for $42 per share. Would an investor want to convert the bonds now?
Yes
No
Suppose analysts expect Cheung to pay a dividend of $4.00 per share at the end of the year and for the dividend to grow at a constant rate of 5% per year. What is the expected conversion value five years from now?
$1,179.46 per share
$589.73 per share
$786.31 per share
$3,653.38 per share
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