A $l, 000 corporate bond is convertible to 50 shares of the corporation's common stock.What is the minimum price that the stock must obtain before bondholders would consider converting a bond to the company's common stock?

Question

Quizplus · Accepted Answer

To determine the minimum price at which bondholders would consider converting a bond to the company's common stock, we need to compare the value of keeping the bond versus converting it to stock.

If the stock price is below $20, then bondholders would be better off keeping the bond since converting it to stock would result in a value lower than the $1,000 face value of the bond.

If the stock price is above $20, then bondholders would prefer to convert the bond to stock, as they would receive more value from the stock compared to the bond's face value.

Therefore, the minimum price for the stock that would make bondholders consider conversion is $20.

A $L, 000 Corporate Bond Is Convertible to 50 Shares