# Floor Price of a Convertible Bond

Valdes Enterprises is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value. The bonds would have an 8.00% annual coupon, and each bond could be converted into 20 shares of common stock. The required rate of return on an otherwise similar nonconvertible bond is 10.00%. The stock currently sells for $40.00 a share, has an expected dividend in the coming year of $2.00, and has an expected constant growth of 5.00%. What is the estimated floor price of the convertible at the end of Year 3?

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#### Solution Preview

The floor price would be the higher of straight bond price or the conversion value.

The price of a straight bond is the present value of interest and principal discounted at the required return. ...

#### Solution Summary

The solution explains how to calculate the floor price of the convertible bond in 147 words with calculations clearly displayed.