The holders of Xenron Corporation's bond with a face value of €1,000 can exchange that bond for 35 shares of equity.The equity is selling for €22.00.What is the conversion premium?

Question

Quizplus · Accepted Answer

First, we need to calculate the intrinsic value of the bond. 
Intrinsic value = (Market value of equity shares x Conversion ratio) = (€22.00 x 35) = €770.00.

Now, let's calculate the price of the bond in the market. 
If the bond is selling at par, it would sell for €1,000. 
So, the conversion premium = ((Price of bond in market - Intrinsic value of bond) / Intrinsic value of bond) x 100
= ((€1,000 - €770) / €770) x 100
= 29.86%

Therefore, the answer is B.

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