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
The profit volume ratio of xltd. is 50% and the margin of safety is 40%.you are required to calculate the net profit if sales volume is rs.100,000?


Break-Even Calculations As they say, a picture is significance a thousand words, and this is undoubtedly true for the CVP graphic just presented. Though, everyone is not an art

XYZ Inc. plans to raise $5,000,000 external financing through issuing bonds, and is considering two options: regular bonds and zero couple bonds.  The regular bonds will have coupo

Relationship among Financial Accounting and Cost Accounting The difference among management and cost accounting may be highlighted by using a number of questions namely as;

Vorticella can first be seen by the naked eye, b.ut to study it place a prepared slide under the microscope. Focus it under low power, and observe it. You can see a large number of

Explanations on the correct fixation of selling price

Average costing method has the following main advantages: 1.It is a realistic costing method useful to management in analyzing operating results and appraising future production

Day Corporation purchased a patent on January 1, 2012 for $360,000. The patent had a useful life of 10 years at that date. In January of 2013, Day successfully defends the patent

Your company completed the site work for the South Pointe office complex. The costs are shown in Figure 11-3. The site concrete labor and landscaping were done by subcontractors. T