Problem:
Dash Incorporated has the following convertible bond outstanding:
Coupon ........................ 5%
Principal ....................... $1,000
Maturity ........................ 12 years
Conversion price ............ $33.34
Conversion ratio ............ 30 shares
Call price ..................... $1,000 + one year's interest
The bond's credit rating is BB, and comparable BB-rated bonds yield 9 percent. The firm's stock is selling for $25 and pays a dividend of $0.50 a share. The convertible bond is selling for $1,000.
Required:
Question 1: What is the premium paid over the bond's value as debt? What justifies this premium?
Question 2: Given the bond's income advantage, how long must the investor hold the bond to overcome the premium over the bond's value as stock?
Question 3: If the price of the stock were to decline by 50 percent, what is the worst performance that the bond should experience and why?
Question 4: If after four years the price of the stock has risen to $40, what is the minimum percentage increase in the bond's price?
Question 5: If the company pays a 20 percent stock dividend (i.e., not a cash dividend), what impact will that payment have on the price of the convertible bond?
Question 6: If the bond is not converted, what does the investor receive when the bond matures? What is the annual return on the investment?
Question 7: Is there any reason to expect that the firm will currently call the bond?
Question 8: If the price doubles and if the bond is called and investors do not convert, what do they receive?
Note: Please explain comprehensively and give step by step solution.