The Bradford Company has debentures outstanding (par value ¼ $1,000) that are convertible into common stock at a price of $40 per share. The convertible bonds have a coupon interest rate of 8 percent and mature in 20 years. The con- vertible bonds are callable at 102 percent of par value. The company has a mar- ginal tax rate of 40 percent.
a. Calculate the conversion value of the bonds if Bradford's common stock is selling for $35 per share.
b. Calculate the straight-bond value, assuming that straight debt of equivalent risk and maturity is yielding 11 percent.
c. Determine the conversion premium if the market value of the bonds is $925.
d. Determine the conversion value of the bonds if the company's common stock price increases to $55 per share.
e. Given the information in part d, what is a realistic estimate of the market price of the convertible bond issue? (No numerical calculations are necessary for this part of the problem.)