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Hamilton Products Case 30
Convertibles
Purpose: The case encourages the student to more fully appreciate the financial characteristics of
convertible bonds. It also allows the student to see that the pure bond value is not necessarily stable,
but may change because of changing interest rates or business risk. The student not only views
upside potential, but increasing downside exposure as well.
Relation to Text: The case should follow Chapter 19. However, the student will also need to utilize
material from Chapter 10 for a bond value computation.
Complexity: The case tends to be reasonably straightforward and requires about ½ hour.
Solutions
1. Conversion value = Conversion ratio x Common stock price
2. First determine the conversion value:
Conversion value = Conversion ratio x Common stock price
3. First determine the conversion value:
Conversion value = Conversion ratio x Common stock
4. Pure Bond Value
Present value of interest payments
Present value of principal payment (par value) at maturity
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
5. Andre should probably not take too much comfort in the pure bond price. The convertible bond is
selling for $901.25 as indicated in question 3 and the pure bond value is $719.43. That indicates a
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
