Cheung Zap Inc. just issued 19-year convertible bonds at a par value of $1,000. At any time before maturity, investors have the option to exchange their bonds for shares of Cheung's common stock at a conversion price of $48.96. Cheung's convertible bonds pay a 6.12% annual coupon, but if Cheung had issued straight-debt bonds (no conversion), it would have had to pay 10.20% annual interest.
Cheung Zap Inc. just issued 19-year convertible bonds at a par value of $1,000. At any time before maturity, investors have the option to exchange their bonds for shares of Cheung's common stock at a conversion price of $48.96. Cheung's convertible bonds pay a 6.12% annual coupon, but if Cheung had issued straight-debt bonds (no conversion), it would have had to pay 10.20% annual interest.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Pls if u can't do all parts or skip. options are -
Conversion Ratio - 13.55; 24.50; 20.42; 18.96
Straight debt value - 1,200; 663.18; 505.22; 928.45
Value of the convertible - 336.82; 494.78; 71.55; -200.00
Transcribed Image Text:Consider the case of Cheung Zap Inc.:
Cheung Zap Inc. just issued 19-year convertible bonds at a par value of $1,000. At any time before maturity, Investors have the option
to exchange their bonds for shares of Cheung's common stock at a conversion price of $48.96.
Cheung's convertible bonds pay a 6.12% annual coupon, but if Cheung had issued straight-debt bonds (no conversion), it would have
had to pay 10.20% annual interest.
Based on the information available, complete the table:
Conversion ratio of Cheung's bond issue:
Straight-debt value of this convertible debt issue:
Value of the convertible option:
OYes
Value
Cheung's common stock currently sells for $26 per share. Would an investor want to convert the bonds now?
No
per bond
per bond
Transcribed Image Text:Suppose analysts expect Cheung to pay a dividend of $4.00 per share at the end of the year and for the dividend to grow at a constant rate of 5% per
year. What is the expected conversion value five years from now?
O $1,624.49 per share
O $1,016.31 per share
$677.54 per share.
O $508.16 per share.
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