EBK CFIN
5th Edition
ISBN: 9781305888036
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 6, Problem 1PROB
Summary Introduction
The convertible bonds have a face value of $1,000 which can be converted into 25 common shares.
Convertible bonds or debenture is a type of bond which has the option of converting the bonds to common shares. Each share price or the conversion price is determined by the face
Conversion ratio is the number of shares which the investor will receive per bond, whereas, conversion price is the price which is paid for obtaining each stock by converting the bond.
Conversion price could be calculated as follows:
Expert Solution & Answer
Explanation of Solution
Calculate the conversion price or the market price of the stock as below:
Therefore, the minimal stock price that would be beneficial for stockholders to convert their bonds is
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Students have asked these similar questions
You bought a convertible bond issued by Zip Corp which has a conversion ratio of 50 common shares for each $1,000 bond.
A) At what stock price per share would you make a profit (“in the money”) if you bought the bond at par?
B) What would you expect the bond to sell for in the market if Zip Corp’s stock trades at $28.50 per share?
Suppose you own a convertible bond that has a conversion ratio equal to 62. Each convertible bond has a face value equal to $1,000. The current market value of the company's common stock is $16, and the bond is selling for $1,042. If you want to liquidate your position today because you need money to pay your rent, should you sell the bond or should you convert the bond into common stock and then sell the stock? Explain your answer. Round your answers to the nearest dollar.
Selling the bond would generate $_______ . Converting the bond and selling the common stock would generate $_______ . Thus, it would be better to SELL THE BOND / CONVERT THE BOND INTO COMMON STOCK AND THEN SELL THE STOCK
Suppose you own a convertible bond that has a conversion ratio equal to 58. Each convertible bond has a face value equal to $1,000. The current market value of the company's common stock is $17, and the bond is selling for $1,036. If you want to liquidate your position today because you need money to pay your rent, should you sell the bond or should you convert the bond into common stock and then sell the stock? Explain your answer. Round your answers to the nearest dollar.
Selling the bond would generate $ . Converting the bond and selling the common stock would generate $ . Thus, it would be better to .
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