Florida Enterprises is considering issuing a 10-year convertible bond that will be priced at its $1,000 par value. The bonds have an 8.0 percent annual coupon rate, and each bond can be converted into 20 shares of common stock. The stock currently sells at $40 a share, has an expected dividend in the coming year of $5, and has an expected constant growth rate of 5.0 percent. What is the estimated floor price of the convertible at the end of Year 3 if the required rate of return on a similar straight-debt issue is 10.0 percent?
We first find the price of the bod at the end of year 3. The price of a bond is the preent value of the interest and principal. The bond has an interest payment of $80 and a principal repayment of $1,000. ...
The solution explains how to calculate the floor price of the convertible security.