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Sadfield Manufacturing Company plans to issue $10 million in 6 percent convertible subordinated debentures. currently, the stock price is $36 per share, and the company believes it could obtain a conversion premium (issuing price in excess of conversion value) of approximately 12 percent. The call price of the debenture in the first 10 years is $1,060 per bond, after which it drops to $1,030 in the next 10 years and to $1,000 in the last 10 years. To allow for fluctuations in the market price of the stock, the company does not want to call the debentures until their conversion value is at least 15 percent in excess of the call price. Earnings per share are expected to grow at an 8 percent compound annual rate in the foreseeable future, and the company envisions no change in its price/eamings ratio. a. Determine the expected length of time that must elapse before the company is in a position to force conversion. b. Is the issuance of a convertible security a good idea for the company?
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