Estimate the conversion value- stock price volatility, Cost Accounting

Assignment Help:

(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.


Related Discussions:- Estimate the conversion value- stock price volatility

Alternative to total overhead variances, Alternative to Total Overhead Vari...

Alternative to Total Overhead Variances There is an easier approach to overhead variances.  In this approach, the overheads are NOT sub-divided into their fixed and variable e

Differential costing, What do you mean by differential costing ? How it dif...

What do you mean by differential costing ? How it differ from marginal costing ? explain its practical application with examples?

Motivation - behavioural aspects of standards, Motivation - Behavioural Asp...

Motivation - Behavioural Aspects of Standards Variance analysis and standards setting requires to be carried out like it motivates managers and other employees. It should not

Manufacturing concern to organization, Manufacturing Concern to Organizatio...

Manufacturing Concern to Organization There are three manufacturing centres as Making, Packing and Finishing.  These are supported through five support departments, namely Mai

Calculate the equivalent units of production, A company manufactures two pr...

A company manufactures two products, Product A manufactured in Process Y and Product B manufactured in Process Z. The following information is available for a period:

Compute the variable cost, A soft drink maker wants to expand into a neighb...

A soft drink maker wants to expand into a neighboring country.  They want the product bottled in that country to avoid political issues and to enhance the local image of the produc

Example of economic order quantity, Example of Economic Order Quantity ...

Example of Economic Order Quantity The EOQ model supposes : - Annual demand is recognized - Hold costs are constant and recognized - Ordering costs are recognized a

Critical thinking about cvp, The Critical Thinking about CVP is described b...

The Critical Thinking about CVP is described below CVP is more than just a mathematical tool/device to calculate values such as the break-even point. It can be used for the cri

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd