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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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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.