Question: a dorsini sportswear issued a semiannual coupon convertible bond some...
(a) Dorsini Sportswear issued a semiannual coupon convertible bond some years ago, with face value as $1,000, semiannual coupon as $33 and conversion ratio as 40 shares. The bond will mature 2 years later from today, which means bondholders could receive the coming 4 semiannual coupon payments. Each convertible bond is currently trading at $1,011.
Suppose the appropriate discount rate is 8%p.a. and the current stock price is $24 per share.
(i) Determine the option value of the semiannual coupon convertible bond.(6 marks)
(ii)Analyze what would happen to the price of the convertible bond if the stock volatility of Dorsini Sportswear increases. (2 marks)
(b) Ancus Inc., newly issued 750,000 units of warrants. The holder of each warrant has the right to purchase one share of common stock for an exercise price of $9.5. Ancus Inc., is an all-equity firm, has 10 million shares of common stock outstanding. The current stock price is $12.5, and each warrant is worth $3.5.