Convertible Bonds & Warrants
a) Preissle Company, wants to sell some 20-year, annual interest, $1,000 par value bonds. Its stock sells for $42 per share, and each bond would have 25 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm’s straight bond yield 10%. Each warrant is expected to have a market value of $5.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?
b) The following data apply to Neuman Corporation’s convertible bonds:
Maturity: 10
Par value: $1,000.00
Annual coupon: 5.00%
Stock price: $40.00
Conversion price: $50.00
Straight-debt yield: 9.00%
i.) What is the bond’s conversion ratio?
ii.) What is the bond’s conversion value?
iii.) What is the bond’s straight-debt value?
iv.) Based on your answers to the three preceding questions, what is the minimum price (or “floor” price) at which the Neuman’s bonds should sell?