The Bates Company has debentures ($1,000 par value) outstanding that are convertible into the company's common stock at a price of $50. The convertibles have a coupon interest rate of 9% and mature 20 years from today. Straight debt of equivalent risk is yielding 12% today. The company's common stock today is selling at $60 a share. Calculate the conversion value of the issue.
A) $1,000
B) $1,200
C) $800
D) $300

Question

Quizplus · Accepted Answer

The conversion value of the issue is calculated as follows:
Conversion ratio = $1,000 / $50 = 20 shares
Conversion value = 20 shares x $60 per share = $1,200

The Bates Company Has Debentures ($1,000 Par Value) Outstanding That