Chapter 17, Problem 17.14P

Determining values: Convertible bond Craig’s Cake Company has an outstanding issue of 15-year convertible bonds with a $1,000 par value. These bonds are convertible into 80 shares of common stock. They have an 8% annual coupon rate, whereas the interest rate on straight bonds of similar risk is 10%.

1. a. Calculate the straight bond value of this bond.
2. b. Calculate the conversion (or stock) value of the bond when the market price is $9, $12, $13, $15, and $20 per share of common stock.
3. c. For each of the common stock prices given in part b, at what price would you expect the bond to sell? Why?
4. d. Make a graph of the straight value and conversion value of the bond for each common stock price given. Plot the per-share common stock prices on the x-axis and the bond values on the y-axis. Use this graph to indicate the minimum market value of the bond associated with each common stock price.