4/19/2010Chapter 19. Ch 19-08 Build a ModelInputs:Straight bond yield7%Current stock price$22.00Expected growth rate in stock price7%Dividend yield4%Par value (and issue price) of convertible bond$1,000.00Coupon rate on convertible bond6.00%Maturity of convertible bond (years)20Conversion ratio32Call protection period (years)5Call price when call protection ends$1,090.00Call price decline per year after protection period$6.0025%Maggie's Magazines (MM) has straight nonconvertible bond that currently yield 9%. MM's stock sells for $22 per share, has an expected constant growth rate of 6%, and has a dividend yield of 4$. MM plans on issuing convertible bonds that will have a $1,000 par value, a coupon rate of 8%, a 20-year maturity, and a conversion ratio of 32 (i.e., each bond could be convertible into 32 shares of stock). Coupon payments will be made annually. The bonds will be noncallable for 5 years, after which they will be callable at a price of $1,90; this call price would decline by $6 per year in Year 6 and each year thereafter. For simplicity, assume that the bonds may be called or converted only at the end of a year,
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