I just need help with how to determine if a convertible bond is a good source of

ID: 2657385 • Letter: I

Question

I just need help with how to determine if a convertible bond is a good source of funding. I have the following information. Where would I start?

1. Up to $8,000,000 would be available

2. The interest would be 11.5%

3. Each $1,000 bond would be convertible into 12.5 shares of Rondo common stock

4. Cash dividends would be restricted. Cash dividends could not be paid unless net income was 20% of the value of bonds outstanding.

5. The bond will be for 20 years.

Assume the discount rate is 10% and the net income is 20,000,000 (or any figure)

80,00,000 * 11.5% (interest) = $920000

year cash flow annuityfactor(10%) dicounted cashflow

1-20 $920000 8.5135 78,32,420

20 $80,00,000 0.1486 11,88,000

total fair value = 90,20,420

less:- cost of bond (80,00,000)

present value of net income = $10,20,420

so it is best to have convertible bond since giving positive return