SBX bonds have a face value of $1,000 and can be exchanged for 20 shares of stock.Assume SBX declares a 3-for-1 stock split.What conversion price will be needed following the stock split for the conversion value and the straight bond value to be equal assuming the bond continually sells at par?
A)$16.67
B)$33.33
C)$50.00
D)$150.00
E)$66.67

Question

Quizplus · Accepted Answer

Before the stock split, the conversion rate is 20 shares per bond, so the conversion price is $50 ($1,000 / 20 shares). After the stock split, the conversion rate becomes 60 shares per bond (3-for-1 split multiplied by the original 20 shares per bond), so the new conversion price is $16.67 ($1,000 / 60 shares). To ensure that the conversion value and the straight bond value are equal after the split, the straight bond value must also be $1,000 / 60 shares, which is $16.67. Therefore, the conversion price needed for equality is $16.67. Choice A is correct.

SBX Bonds Have a Face Value of $1,000 and Can