The Swift Company was planning to finance an expansion in the summer of 2009. The principal executives of the company agreed that an industrial company like theirs should finance growth by means of common stock rather than by debt. However, they believed that the price of the company's common stock did not reflect its true worth, so they decided to sell a convertible bond.
a. What conversion price should be set by the issuer? The conversion rate will be 5.0; that is, each $1,000 face-value convertible bond can be converted into five shares of common stock.
b. Do you think the convertible bond should include a call provision? Why or why not?