Following information is related to the 7.50% Convertible bond of S Ltd. which is currently priced at 5300 per bond: Conversion Parity Price =…

(i) No. of Shares on Conversion Conversion Parity Price = Bond Price / No. of Shares on Conversion 265 = 5300 / No. of Shares on Conversion No. of Shares on Conversion = 20 Shares (ii) Current Market Price Per Share of S Ltd. Conversion Premium = [(Conversion Parity Price - Market Price) / Market Price] × 100 10.41667% = [(265 - Market Price) / Market Price] × 100 0.1041667 = (265 - Market Price) / Market Price 0.1041667 × Market Price = 265 - Market Price 1.1041667 × Market Price = 265 Market Price = 265 / 1.1041667 = 240 (iii) Straight Value of Bond Percentage of Downside Risk = [(Market Price of Bond - Straight Value of Bond) / Straight Value of Bond] × 100 12.766 % = [(5300 - SV) / SV] × 100 0.12766 = (5300 - SV) / SV 0.12766 × SV = 5300 - SV 1.12766 × SV = 5300 Straight Value of Bond = 5300 / 1.12766 = 4700 (iv) Approximate required rate of return To determine the required return, we shall discount related cash flows as follows: Assuming the bond has a face value of 5000 (typical for convertible bonds if not specified, or derived from the straight value) and coupon rate of 7.50% (given in question), annual coupon payment = 7.50% of 5000 = 375. Assuming 5 years maturity for PVF table. PV@8% Year Cash Flow PVF PV 0 - 4700 1 - 4700 1 375 0.9259 347.21 2 375 0.8573 321.49 3 375 0.7938 297.68 4 375 0.7350 275.63 5 5375 (375+5000) 0.6806 3658.23 200.23 PV@10% Year Cash Flow PVF PV 0 - 4700 1 - 4700 1 375 0.9091 340.91 2 375 0.8264 309.90 3 375 0.7513 281.74 4 375 0.6830 256.13 5 5375 (375+5000) 0.6209 3337.34 - 173.99 Calculation of Required return using IRR = 8% + [200.23 / (200.23 + 173.99)] × 2% = 8% + [200.23 / 374.22] × 2% = 8% + 1.07% = 9.07%