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# Answer to Question #15658 in Finance for noel

Question #15658
Valdes Enterprises is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value. The bonds would have an 8.00% annual coupon, and each bond could be converted into 20 shares of common stock. The required rate of return on an otherwise similar nonconvertible bond is 10.00%. The stock currently sells for$40.00 a share, has an expected dividend in the coming year of $2.00, and has an expected constant growth rate of 5.00%. What is the estimated floor price of the convertible at the end of Year 3? 1 Expert's answer 2012-10-02T07:49:19-0400 Bond V =$80(PVIFA10%,7) + $1,000(PVIF10%,7) =$902.63.

Conversion V = 20($40)(1.05) 3 =$926.10.
The floor value is the greater of the bond value or the
conversion value. Thus, the floor value is \$926.10.

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