Question

Standard Olive Company of California has a $1,000 par value convertible bond outstanding with a coupon rate of 8 percent and a maturity date of 20 years. It is rated Aa, and competitive, nonconvertible bonds of the same risk class carry a 22 percent yield. The conversion ratio is 20. Currently the common stock is selling for $30 per share on the New York Stock Exchange.

a. What is the conversion price? (Round your answer to 2 decimal places.)

Conversion Price: $50.00

b. What is the conversion value? (Round your answer to 2 decimal places.)

  Conversion value: $600.00

c. Compute the pure bond value. (Use semiannual analysis.) Use Appendix B and Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

BOND VALUE?????

d. Calculate the crossover point at which the pure bond value equals conversion value. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

SHARE PRICE AT CROSSOVER POINT?????

Answer 1

Requirement 1: Conversion Price Face value Conversion Ratio S1,000/20 S50 Requirement 2: Conversion value Stock Price Conversion ratio $30 20 $600 Requirement 3: Pure bond value PV of annual coupons + PV of Principle payment 3($1,000*8 %*( 6/12)) *PVAF (5.5%,40) +51.000*PVF(5.5%,40) - S40 16.04612 S1,000 0.117463 So Pure bond value $759.31 Requirement 4: Crossover point at which the pure bond value equals conversion value Pure bond value Stock price S759.31 30 25.31