Convertible debentures calculation

CD has issued 50,000 units of convertible debentures, each with a nominal value of $100 and a coupon rate of interest of 10% payable yearly. Each $100 of convertible debentures may be converted into 40 ordinary shares of CD in three years time. Any stock not converted will be redeemed at 110.

Estimate the likely current market price for $100 of the debentures, if investors in the debentures now require a pre-tax return of only 8%, and the expected value of CD’s ordinary shares on the conversion day is 2.50 per share.

a $111.11 per $100 of debentures
b $113.11 per $100 of debentures
c $115.11 per $100 of debentures
d $118.11 per $100 of debentures

Answer – B

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