Question

Standard Olive Company of California has a convertible bond outstanding with a coupon rate of 10 percent and a maturity date of 15 years. It is rated Aa, and competitive, nonconvertible bonds of the same risk class carry a 14 percent return. The conversion ratio is 25. Currently the common stock is selling for $35 per share on the New York Stock Exchange. a. What is the conversion price? (Round your answer to 2 decimal places.) b. What is the conversion value? (Round your answer to 2 decimal places.) 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.) d. Calculate the crossover point at which the pure bond value equals conversion value.

Answer 1

		Assume Par value of bond	$1,000
		Conversion Ratio	25
		Conversion Price	$40
		CONVERSION VALUE:
		Number of shares to be received	25	(1000/40)
		Market price	$35
		Conversion Value	$875	(25*35)
		PURE BOND VALUE:
	Pmt	Annual Coupon payment	$100	(1000*10%)
	Nper	Number of payment	15
	Rate	Yield of non convertible bonds	14%
	Fv	Payment at maturity of pure bond	$1,000
	PV	PURE BOND VALUE:	$754.31	(Using PV function with Rate=14%, Nper=15, Pmt=-100, Fv=-1000)
		Excel Command: PV(14%,15,-100,-1000)
		CROSS OVER RATE
	Pv	Pure Bond value	$875
	Nper	Number of payment	15
	Pmt	Annual Coupon payment	$100
	Fv	Payment at maturity of pure bond	$1,000
	RATE	Cross over Rate	11.82%	(Using RATE function with Nper=15, Pmt=100, Pv=-875,Fv=1000)
		Excel Command:RATE(15,100,-875,1000)