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Question
a firm has both a convertible bond and a convertible preferred stock outstanding. the convertible bond has the following features:
coupon 6.5%
maturity date 10 years
exercise price $20
principal $1,000
call price $1,065.
the convertible preferred stock has the following features:
annual dividend $2.25
convertible into 2.5 shares of common stock
callable at $25 a share.
currently the common stock is selling for $13; the yield on nonconvertible bonds is 10%, and the yield on comparable preferred stocks is 14%. what is the value of the above securities in terms of the common stock? what would be the value of each security if it lacked the conversion feature?
Answer
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