Piglet Pies has issued a zero-coupon 12-year bond that can be converted into 10
ID: 2613636 • Letter: P
Question
Piglet Pies has issued a zero-coupon 12-year bond that can be converted into 10 Piglet shares. Comparable straight bonds are yielding 10%. Piglet stock is priced at $62 a share.
a. Suppose that you had to make a now-or0never decision on whether to convert or stay with the bond. Which would you do? Convert the bond OR Stay with the bond
*Do not round intermediate calculations. Round your answer to 2 decimel places.*
b. If the convertibel bond is priced at $407, how muh are investors paying for the option to buy Piglet shares?
c. If after one year the value of the conversion option is unchanged, what is the value of the convertible bond?
Explanation / Answer
Solution :
a. Present Value of bond @10% discount rate = Face value X Cumulative discount rate @10% for 12th year
= 1000 x 0.318631
= 318.63
If converted into stock then value will be 10 X 62 = 620.
Hence it is better to convert.
b. If the convertible bond is priced at $407, then investors paying $407 for the option to buy 10 Piglet shares.
c. If after one year the value of the conversion option is unchanged, the value of the convertible bond is 10 shares X 62 = 620.