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 a 13% annual coupon interest rate, whereas the interest rate on straight bonds of similar risk is 16%.
a. Calculate the straight bond value of this bond.
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.
c. For each of the common stock prices given in part b, at what price would you expect the bond to sell? Why?
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.