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

Reef Office Supplies is interested in estimating the cost involved in hiring new employees. The following information is available regarding the costs of operating the Human Resour

Go the Hershey website to learn how to make Hershey chocolate. Review the process and take a look at some of the videos. Pay particular attention to the process steps of milling an

Variable Overhead Efficiency Variance Budget for December 2003; Shs. Fixed Overheads 11,480 Variable Over

The Pacific Manufacturing Company operates a job-order costing system and applies overhead cost to jobs on the basis of direct labor cost. Its predetermined overhead rate was based

Effects of differential cost analysis in decision making

Contract Costing It is a form of exact order costing, which is applied to relatively large cost units that normally get a considerable length of time to complete as an example


It may be dispute that  in a  total quality environment, variance analysis  from a standard costing system is redundant.í Talk about the validity of this statement.

introduction on proess costing