A firm has both a convertible bond and a convertible preferred stock outstanding. The convertible bond has the following features:
      Coupon         6.5%
      Maturity date   10 years
      Exercise price $20
      Principal   $1,000
      Call price  $1,065

The convertible preferred stock has the following features:
      Annual dividend    $2.25
      Convertible into 2.5 shares of common stock
      Callable at $25 a share

Currently the common stock is selling for $13; the yield on non-convertible bonds is 10%, and the yield on comparable preferred stocks is 14%. What is the value of the above securities in terms of the common stock? What would be the value of each security if it lacked the conversion feature?

Question

A firm has both a convertible bond and a convertible preferred stock outstanding. The convertible bond has the following features: 
       Coupon         6.5% 
       Maturity date   10 years 
       Exercise price $20 
       Principal   $1,000 
       Call price  $1,065 
 ​ 
 The convertible preferred stock has the following features: 
       Annual dividend    $2.25 
       Convertible into 2.5 shares of common stock 
       Callable at $25 a share 
 ​ 
 Currently the common stock is selling for $13; the yield on non-convertible bonds is 10%, and the yield on comparable preferred stocks is 14%. What is the value of the above securities in terms of the common stock? What would be the value of each security if it lacked the conversion feature?

Quizplus · Accepted Answer

The Answer of A firm has both a convertible bond and a convertible preferred stock outstanding. The convertible bond has the following features: 
       Coupon         6.5% 
       Maturity date   10 years 
       Exercise price $20 
       Principal   $1,000 
       Call price  $1,065 
 ​ 
 The convertible preferred stock has the following features: 
       Annual dividend    $2.25 
       Convertible into 2.5 shares of common stock 
       Callable at $25 a share 
 ​ 
 Currently the common stock is selling for $13; the yield on non-convertible bonds is 10%, and the yield on comparable preferred stocks is 14%. What is the value of the above securities in terms of the common stock? What would be the value of each security if it lacked the conversion feature?

A Firm Has Both a Convertible Bond and a Convertible