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What is the expected rate of return on the proposed

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Reference no: EM132966789

Straight bond yield 7%

Current stock price $22.00

Expected growth rate in stock price 7%

Dividend yield 4%

Par value (and issue price) of convertible bond $1,000.00

Coupon rate on convertible bond 6.00%

Maturity of convertible bond (years) 20

Conversion ratio 32

Call protection period (years) 5

Call price when call protection ends $1,090.00

Call price decline per year after protection period $6.00

Policy for call: Call when conversion value exceeds this percent over bond's par value 25%

Problem 1: What is the expected rate of return (i.e., before-tax component cost) on the proposed convertible issue?

Reference no: EM132966789

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