A company in the semiconductor industry has a $1,000 convertible bond with a conversion ratio of 32 and a coupon of 3.9%. The bond is currently priced at $740. The company’s stock trades at $19, and pays an annual dividend of $0.75.
a. Find the conversion value of this bond. Explain what this means.
b. Find the conversion premium in dollars and in percent.
c. Find the payback period. Explain what this means in your own words without quoting the definition of payback period. In addition, state whether or not this is considered to be an acceptable payback period.