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QUESTION

# 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?