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Ch19 P08 Build a Model - A 1 2 3 4 5 6 7 8 9 10 11 12 13 14...

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4/19/2010 Chapter 19. Ch 19-08 Build a Model Inputs: Straight bond yield 7% Current stock price $22.00 Expected growth rate in stock price 7% Dividend yield 4% Par value (and issue price) of convertible bond $1,000.00 Coupon rate on convertible bond 6.00% Maturity of convertible bond (years) 20 Conversion ratio 32 Call protection period (years) 5 Call price when call protection ends $1,090.00 Call price decline per year after protection period $6.00 25% 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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