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Bond into Shares Assignment

Author:
February 18th, 2020

As of January 1, 2017, suppose you hold a bond issued by Wehner Company. A 10-year remaining maturity, 8% coupon bond paying coupons annually is convertible into 10 shares of Wehner Company. The bond sells at the yield to maturity of 8%. In addition, Wehner has a beta of 0.8, the required rate of return on the market is 10%, and the risk-free rate is 2%. (12)

a. If Wehner will pay a year-end dividend of $3 and expects to grow its dividend at constant 5% in the future, do you want to convert your bond into the shares of Wehner stock? Explain your answer. (4)

b. Wehner announces that the company will initiate new project that results ROE of 10% from the next year (i.e., 2018). If the firm is reinvesting 60% of its earning, do you want to convert your bond into the shares of Wehner stock? Why? (4) Get Finance homework help today

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