Response to the following problem:
The common stock of the Blue Sky Corporation earns $3 per share, has a 60 percent dividend payout, and sells at a P/E ratio of 8.333. Blue Sky wishes to offer $10 million of 9 percent, 20-year convertible debentures with an initial conversion premium of 20 percent and a call price of 105 ($1,050 per $1,000 face value). Blue Sky currently has 1 million common shares outstanding and has a 40 percent tax rate.