What is the conversion ratio of the bonds

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Reference no: EM132209148

Question - On Friday Oct 27, 2017, Savagnin Corp. announced the public issuance of 175,000 convertible bonds with face value $1000 each. The conversion price of the bonds is anticipated to be $4.53 per share. Currently, Savagnin has 224.3M shares outstanding, trading at $4.10 and pays no dividend. Assume that the company has no additional debt.

The bonds will pay a 5.5% coupon annually on Oct 27, with the first payment arriving in 2018 and the last one arriving in 2047. The bonds sell for par and the appropriate discount rate for the straight bond portion of the convertible bond is 10%. The bonds may be converted on or before Oct 27 of 2047. You may assume that today is Oct 27 for discounting purposes.

(a) What is the conversion ratio of the bonds? What number of shares outstanding will the issuance add if the bonds are exercised at maturity?

(b) What is the value of the conversion option of the issuance at the issue date?

(c) Assuming none of the bonds have been previously exercised, draw the aggregate payoff diagram for the convertible bonds on Oct 27, 2047. Make sure that your diagram is clearly labelled.

(d) You are long both a put option and a call option on Monopole Winery with the same expiration date. The exercise price of the call option is $40 and the exercise price of the put option is $30. Graph the payoff of the combination of options at expiration Label the axes appropriately.

Reference no: EM132209148

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