Calculate value of option to buy stock by exchanging bond

Assignment Help Financial Management

Reference no: EM131887213

Omnicom wants to issue $100 million worth of convertible debentures (100,000 bonds issued at par value of $1,000 per bond). They would like the coupon rate to be very low to save on cash interest. Their investment banker tells them that zero coupon convertibles might be the right thing for them. (A zero coupon convertible is just a convertible bond with the coupon rate set to zero.) Suppose that Omnicom was considering a maturity of five years. Given Omnicom’s credit quality, if they issued straight (i.e., non-convertible) zero coupon debt with five years to maturity, they would have to pay an annual yield of 8%. The stock price of Omnicom is $25 per share. a.

Assuming the bond is initially priced at par, calculate the value of the option to buy the stock by exchanging the bond for the shares.

Reference no: EM131887213

Questions Cloud

Attenuation of physical waves : How does absorption and scatter occur, and why do they cause attenuation of physical waves?

What is yield to maturity on the sel subordinated debentures : The expected market risk premium (remember, this is rm-rf), is 7%. What is the yield to maturity on the SEL subordinated debentures?

Physical effect in the glass of the prism : What is the name of the physical effect in the glass of the prism that makes the white light split into a rainbow? How does this effect make the white light

What are your main supporting points : Does each paragraph include a topic sentence? What are your main supporting points? What questions might the reader have that you should address?

Calculate value of option to buy stock by exchanging bond : Assuming the bond is initially priced at par, calculate the value of the option to buy the stock by exchanging the bond for the shares.

What is the mass of boiling water we need to melt all ice : a) What is the mass of boiling water we need to melt all ice? b) What is the nal temperature if we mix the ice from the freezer with 5kg of boiling water?

What are the main processes in project quality management : How do functional., system outputs, performance, reliability, and maintainability requirements affect quality planning?

You have the right to buy using the convertible bond : The conversion ratio is also the number of shares you have the right to buy using the convertible bond.

Is requested master calendar submitted with FIXED activities : "Time management is the managing of your time so that time is used to your advantage and it gives you a chance to spend your most valuable resource.

User Account

All Pages