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Consider a firm with a borrowing cost of 7.5% on unsecured, subordinated straight debt and...

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Accounting

Consider a firm with a borrowing cost of 7.5% on unsecured, subordinated straight debt and a current stock price of $38. The firm may be able to issue four-year convertible bonds at an annual coupon rate of 3.8% by offering a conversion ratio such as 25. If other parameters, such as volatility and dividends is valued at $4.16 per share according to the Black-Scholes option pricing model, what are the values of the straight unsecured bond, the conversion value, and the conversion premium?

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