Answer:
A.Convert the bond
B.$53.59
C. $514.01
Explanation:
a. Calculation for whether to convert or to stay with the bond.
First step
In a situation where the fair rate of return on a 10 year zero-coupon non-convertible bond is 9%, which means the price would be calculated as:
Using this formula
Price =(Face value/(1+Non-convertible bond)^Numbers of years
Let plug in the formula
Price =($1,000/1.09)^10
Price = $422.41
Second step is to calculate for the conversion value
Conversion value = 10×$63 shares
Conversion value= $630
If we convert the gain will be :
Gain=$630 - $422.41
Gain= $207.59
Based on the above calculation this mean you may convert and sell the $10 shares for the amount of $630 which will help you to buy a bond for the amount of $422.41
And in a situation were you decide not to convert, you will own a non-convertible bond of the amount of $422.41, based on this i will convert the bond.
b. Calculation for how much are investors paying for the option to buy Sweeney shares
Amount to be paid = ($476.00-$422.41)
Amount to be paid= $53.59
This means the Investors are paying the amount of $53.59
c. Calculation for the value of the convertible bond
First is to calculate for the value of a comparable non-convertible bon
Bond value = $1,000/1.09^9
Bond value = $460.42
Now let calculate for the value of the convertible bond
Value of the convertible bond = $460.42+ $53.59
Value of the convertible bond= $514.01
Therefore the Value of the convertible bond will be $514.01
