Zinc Company called its 7 percent convertible subordinated debentures for
redemption at the end of last month. The call price was 106 ($1,060 per $1,000
face value). A holder of a $1,000 bond was entitled to convert into 34.7 shares
of stock. At the time of the call announcement, the common stock of Alexander
Zinc was selling at $43 per share.
a. What is
the approximate market price at which the debentures would be selling at the
time of the announcement?
b. By what
percentage would market price per share need to drop before bondholders would
rationally accept the call price?
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