Calculate favorable income differential per share

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Reference no: EM131781387

Question: Consider a convertible bond as follows:

par value = $1,000

coupon rate = 9.5%

market price of convertible bond = $1,000

conversion ratio = 37.383

estimated straight value of bond = $510

yield to maturity of straight bond = 18.7%

Assume that the price of the common stock is $23 and that the dividend per share is $0.75 per year.

a. Calculate each of the following:

1. Conversion value

2. Market conversion price

3. Conversion premium per share

4. Conversion premium ratio

5. Premium over straight value

6. Favorable income differential per share

7. Premium payback period

b. Suppose that the price of the common stock increases from $23 to $46.

1. What will be the approximate return realized from investing in the convertible bond?

2. What would be the return realized if $23 had been invested in the common stock?

3. Why would the return on investing in the common stock directly be higher than investing in the convertible bond?

c. Suppose that the price of the common stock declines from $23 to $8.

1. What will be the approximate return realized from investing in the convertible bond?

2. What would be the return realized if $23 had been invested in the common stock?

3. Why would the return on investing in the convertible bond be higher than investing in the common stock directly?

Reference no: EM131781387

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