Question: Standard Olive Company of California has a convertible bond outstanding with a coupon rate of 9 percent and a maturity date of 15 years. It is rated Aa, and competitive, nonconvertible bonds of the same risk class carry a 10 percent return. The conversion ratio is 25. Currently the common stock is selling for $30 per share on the New York Stock Exchange.
a. What is the conversion price?
b. What is the conversion value?
c. Compute the pure bond value. (Use semiannual analysis.)
d. Draw a graph that includes the pure bond value and the conversion value but not the convertible bond price. For the stock price on the horizontal axis, use 10, 20, 30, 40, 50, and 60.
e. Which will influence the bond price more-the pure bond value or the conversion value?