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Irving Electronics is considering the issuance of a 20-year convertible bond that will be priced at par value of $1,000 per bond.
Irving Electronics is considering the issuance of a 20-year convertible bond that will be
priced at par value of $1,000 per bond. The bonds carry a 12% annual coupon interest rate
and can be converted into 40 common shares. The shares are currently priced at $20 per
share, with an expected annual dividend of $3 and is growing at a constant 5% annual rate.
The bonds are callable after 10 years at $1,050, with the price declining by $5 per year. If,
after 10 years, the conversion exceeds the call price by at least 20%, management is likely to
call the bonds.
What is the conversion price?
