A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $4.70. If the bonds are called on this date, which of the following is the action most likely to be taken by a holder of bond of face value of $10,000?

Question

Quizplus · Accepted Answer

To determine the value of the shares upon conversion, we need to divide the face value of the bond ($10,000) by the conversion price ($9.35), which gives us 1069.52 shares. Multiplying this by the stock price on July 1, 2008 ($4.70) gives us a value of $5,035.51. However, the bondholder is also entitled to receive the accrued interest, which is $69.23 (6% of $1,000 for 69 days). Adding this to the value of the shares gives us a total of $5,104.74, which is greater than the face value of the bond. Therefore, the best option for the bondholder is to convert the bond and accept shares with a value of $10,105.00.

A Firm Issues the Convertible Debt Shown Above