Question: Two years ago, Sixtue Corp. issued 20-year, 10-percent convertible debentures with a face value of $ 1,000 each and a conversion ratio of 40. Had Sixtue issued otherwise similar straight debt, it would have faced an interest rate of 12 percent. Interest rates have increased by about 2 percentage points during the last 2 years. Shares of Sixtue currently trade at $22.50
(a) Compute the current straight-debt value and the current conversion value of the convertibles. What is the present floor price for the convertibles?
(b) Two years later (4 years after the date of the original issue), interest rates on comparable straight debt have decreased to 9 percent, and Sixtue's share price has increased to $32. Recompute the straight-debt value and the conversion value.
(c) What would yearly dividends per share have to be for you to receive a higher annual cash return through converting rather than through holding the convertible debentures?