Estimate the conversion value- stock price volatility, Cost Accounting

(a)  (i) Conversion Value

Conversion Value = Conversion Ratio * Stock Price

                = 22*$40 = $880

(ii) Market Conversion Price

Market Conversion Price = Market Value/Conversion ratio

Market Value = 105% of par value = $1050

Market conversion price = $1050/22 = $47.73

(iii) Premium Payback period

Premium payback period = (Market Conversion price - stock price)/(Bond interest - (Conversion ratio * Dividends per share))/Conversion Ratio

Premium payback period = (47.73 - 40)/($65 - (22*$1.20))/22 = 4.4 years

(b)  (i) Stock price volatility is positively related to the value of the call option, according to the Black-Scholes-Merton option pricing model. The value of a callable convertible bond can be written as follows.

Value of bond = Straight value of bond + Value of call option on stock - value of call option on bond

Hence as stock price volatility increases, the value of the callable convertible bond also increases, because the increase in stock price volatility will increase the value of the call option on stock.

(ii) As seen above,

Value of bond = Straight value of bond + Value of call option on stock - value of call option on bond

As interest rate volatility increases, there will be an increase in the value of the call option on bond. Hence the value of the callable convertible bond decreases with increase in interest rate volatility.

Posted Date: 3/22/2013 5:10:49 AM | Location : United States







Related Discussions:- Estimate the conversion value- stock price volatility, Assignment Help, Ask Question on Estimate the conversion value- stock price volatility, Get Answer, Expert's Help, Estimate the conversion value- stock price volatility Discussions

Write discussion on Estimate the conversion value- stock price volatility
Your posts are moderated
Related Questions
in what ways does specific order costing differ from process costing

Automotive Products  (AP)  designs, manufactures,  and  sells  automotive  parts.  It  has  3 main operating departments: design, engineering, and production.  1.Design  ñ  the

1.    The following table summarizes the short-run production function for your firm. Your product sells for $5 per unit, labor costs $5 per unit, and the rental price of capital i

How would I calculate the debt amortization for a bond issued at discount with a maturity of 12 years, market interest rate at issue 10% annually, 5% semi annually, and has a state

1. Why are marginal costs increasing? Why are they not always constant? You may give examples in some industries or just state two reasons at least.

The budgeted and actual revenues and expenditures of Seaside Township for a recent year (in millions) were as presented in the schedule that follows: 1. Prepare journal entries

(a)  The value of a share of Rio National Equity on 31 December 2002, using the Gordon growth model and the capital asset pricing model, can be determined as follows. Required


Q. Issues to consider when making decisions? At activity level A it can be seen from diagram that sales revenue line intersects the total cost line specifying that this is the

Problem 4-12 Multiproduct CVP [LO 4] Fidelity Multimedia sells audio and video equipment and car stereo products. After performing a study of fixed and variable costs in the prior