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Hi sir, for the question below, the growth in share price is not given. And so how do i calculate the share price in year 4 , in order to determine if conversion is likely or not ?
Also the interest rate on the convertible bond isn’t given. So how do i find the market value of the bond ?
Qn: Saul co has issued $40 million convertible bonds at $106 per $100 nominal value. The bonds may be converted into ordinary shares in 4 years time at a rate of 12 shares for every $100 of convertible bonds. The ordinary shares are currently trading at a price of $8 per share.
What is the conversion premium per underlying share ?
Answer : A
The conversion premium is calculated on the current share price.
So it is 106 – (12 x $8) = £10 in total.
Since there are 12 underlying shares, it is $10/12 = $0.83 per underlying share.
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