Consider the case of Cheung Zap Inc. Cheung Zap Inc. just issued 17-year convert
ID: 1172750 • Letter: C
Question
Consider the case of Cheung Zap Inc. Cheung Zap Inc. just issued 17-year convertible bonds at a par value of $1,000. At any time before maturity, investors have the option to exchange their bonds for shares of Cheung's common stock at a conversion price of $51.84 Cheung's convertible bonds pay a 6.48% annual coupon, but if Cheung had issued straight-debt bonds (no conversion), it would have had to pay 10.80% annual interest. Based on the information available, complete the table: Value | Conversion ratio of Cheung's bond issue: Pure-debt value of this convertible debt issue: Value of the convertible option: Cheung's common stock currently sells for $37 per share. Would an investor want to convert the bonds now? O No O Yes Suppose analysts expect Cheung to pay a dividend of $3.50 per share at the end of the year and for the dividend to grow at a constant rate of 3.5% per year. what is the expected conversion value five years from now?Explanation / Answer
Conversion ratio= bond value/converison pricce
=1000/51.84=19.29
pure debt value can be found using pv formuale in excel:
=pv(rate,nper,pmt,fv,type)
=pv(10.8%,17,(1000*6.48%),1000,0)
=669.97
Value of convertible option= face vlaue-pure debt value=1000-669.97=330.03
No since the present stock price is lesser than the conversion price of 51.84