The holders of Mikayla Corporation's bond with a face value of $1,000 can exchange that bond for 30 shares of stock. The stock is selling for $25.00. What would the conversion price and conversion ratio be if Mikayla had a 4 for 1 stock split?
A) $5.33; 75
B) $8.33; 120
C) $22.00; 125
D) $27.50; 135
E) None of these.

Question

Quizplus · Accepted Answer

Before the stock split, the conversion ratio was 30 shares for each bond, so the conversion price was $25.00/30 = $0.833 per share. After the 4 for 1 stock split, the number of shares per bond will increase by a factor of 4, so the new conversion ratio is 30 x 4 = 120 shares per bond. The new stock price is $25.00/4 = $6.25 per share. Thus, the new conversion price is $6.25 x 120 = $750, and the new conversion ratio is 120. Therefore, the correct answer is B.

The Holders of Mikayla Corporation's Bond with a Face Value