Giant Jumbo, Inc., is a manufacturer of recreational vehicles located in upstate New York. In recent years the company has experienced a huge spike in sales volume, but has had difficulty meeting demand because of limited manufacturing capacity. Backlogs have reached periods in excess of six months, and the company has had to turn away an increasing amount of business because of order backlogs. On November 1, 2005, Giant Jumbo issued $250 million of 10% convertible bonds due in 10 years. The bond issue generated proceeds of $275 million dollars, which the company will use to build a second manufacturing facility on the west coast. Each
$1,000 bond is convertible into 20 shares of common stock, and may be converted at any time prior to maturity.
1. Were the bonds issued at a premium or a discount?
2. What is the face value, contract rate of interest, and maturity date of the bonds?
3. What are convertible bonds? Why might a company issue convertible bonds rather than typical term bonds?
4. At what stock price would it be worthwhile for bond holders to convert the bonds into shares of common stock?