Your firm wants to issue more equity but finds it costly to do so because of investment banking fees and the adverse selection problem associated with equity issuances. Given this, you firm decides to issue convertible bonds because it believes that the stock price will significantly appreciate in the future, implying a high likelihood of conversion. That is, the firm plans to indirectly issue equity by raising capital through the convertible bond market.

Your firm raises capital by selling convertible bonds at $1,350 per bond. Each bond has a face value of $1,000, an annual coupon rate of 4 percent, and an 8 year maturity. The bonds can be exchanged at any time for 50 shares. The expected return on historical straight debt in your firm has been 6 percent per year. There is currently no other debt outstanding.

a) What is the value of the conversion option for each convertible bond?

b) What is the minimum stock price that will induce the bondholders to convert their bonds into stock on the day before maturity?

c) There are 1.0M shares outstanding and 5,000 convertible bonds outstanding. What is the minimum value of the firm that will induce the bondholders to convert their bonds into stock on the day before maturity?