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Coffee Masters is thinking about issuing convertible dentures. The investment banking firm that they were referred to thinks that they can issue convertible debentures with the following characteristics:
-9% coupon
-20-year maturity
-$1,000 par value
-Conversion price of $50/share
The executives of Coffee Masters are only willing to issue these debentures IF the after-tax cost of capital is less than 8%. If the after-tax cost of capital exceeds 8%, they are going to move onto 'Plan B'. Plan B consists of issuing non-convertible debt. Given the following information on the company, what is the minimum price per debenture that they are able to receive to keep the after-tax cost of the debenture at 8%?
-Coffee Masters current common stock price = $43/share
-They anticipate calling the convertible issue five years from now when the common stock price is likely to grow to $60/share
-They are in a 40% tax bracket
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