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Nullcom, Inc., has debentures (face value = $1,000) outstanding that are convertible into common stock at a price of $40 per share. The debentures pay an interest rate of 9 percent per annum and have a remaining life of 10 years. Nonconvertible debentures of a similar credit rating and maturity are selling at a price to yield 11 percent. The current price of a share of Nullcom's stock is $35.
a. Compute the straight bond value of each of these debentures.
b. Compute the conversion value of each of these debentures.
c. What is the absolute minimum price for one of these debentures today? What price would you expect to pay for one of these debentures?
d. If the debentures are called at 105 today and you own 10 of these debentures, what action should you take?
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