Yesterday Dexter's Lab paid a dividend of $2.00 a share on its common stock. The firm's earnings and dividends are expected to grow indefinitely at 5%, and the market requires a 15% rate of return on Dexter's common stock. ?Ten years ago you purchased a convertible debenture of Dexter's Lab. At that time, the bond had 15 years left to maturity and its yield to maturity was 14% a year, compounded semi-annually. The $1,000 par value bond pays an annual coupon of 12%, compounded semi-annually. The bond is convertible into Dexter's common stock at a conversion price of $20 a share.

(a) What price did you pay for the bond?

(b) What annual internal rate of return did you earn over the last 10 years if you convert the bond today?

(c) What annual rate of return did you earn over the last 10 years if, instead of converting, you surrender the bond when it is called today at $1,090?

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