The Findlay Company has debentures outstanding (par value = $1,000) that are convertible into common stock at a price of $50 per share. The convertible bonds have a coupon interest rate of 9 percent and mature in 18 years. The convertible bonds are callable at 103 percent of par value. The company has a marginal tax rate of 40 percent.
a. Calculate the conversion value of the bonds if Findlay's common stock is selling for $45 per share.
b. Calculate the straight-bond value, assuming that straight debt of equivalent risk and maturity is yielding 12 percent.
c. Determine the conversion premium if the market value of the bonds is $935.
d. Determine the conversion value of the bonds if the company's common stock price increases to $65 per share.
e. Given the information in part d, what is a realistic estimate of the market price of the convertible bond issue? (No calculations are required for this part of the problem.)