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In class, we typically infer the value of the conversion option on a convertible bond by subtracting the value of the straight bond component of the convertible bond from the price of the convertible bond itself. In this question, assume you are a CFO that is considering the issuance of a convertible bond and wants to determine the fair price at which this bond should sell. Specifically, you are considering the issuance of a convertible bond with a face value of $100M, a maturity of 10 years, and an annual coupon rate of 6 percent. The conversion option is European and can only be exercised on the day before maturity. The conversion ratio is 2M shares. Based on your firm's credit rating and regular bonds that have been issued by your firm in the past, you determine the expected return on straight debt to be 5 percent. Given that the convertible bond is issued, assume that the stock price can take on only one of three values on the day before maturity: $30 (State B), $60 (State M), or $90 (State G). The respective risk-neutral probabilities are 40 percent, 40 percent, and 20 percent. Because we are given risk-neutral probabilities, the proper discount rate for the expected payoff from the conversion option is the riskfree rate, which we will assume is 4 percent. What is the value of the straight bond component of the convertible bond? What is the payoff of the conversion option in each of the three states of the world on the day before maturity? The option payoff is given by max{ST Times 2M - final bond payment, }. What is the value of the conversion option today? This is calculated as the present value of the expected payoff from the conversion option. Based on your numbers in (a) and (c), what is the value of the convertible bond?
Operations Management is about a book review. Title of the book is "Goal". This book has been written by Dr. Eliyahu Goldartt. The book has been appreciated by many as one of those books which offers an insight into the operations and strategic capac..
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An analysis of the holding costs, including the appropriate annual holding cost rate.
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Ccompare the effectiveness of different leadership styles in different organizations
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