ABC Limited has in issue 14.5% convertible bond currently quoted on the NYSE at $108 per $100 nominal immediately after payment of the annual interest. The bond will be convertible into ordinary shares in 6 years time at a rate of 42 shares per $100 nominal bond. The current market price per ordinary share is $2.65. Assuming the yield on the a comparable straight debenture is 15%.
You are required to calculate the average annual rate of growth in the share price that would be necessary for the holders of the convertible debenture to achieve an overall return of 16% compounded over the next six(6) years, including the proceds of conversion.