A firm has an outstanding bond with a $1,000 par value that is convertible at $40 per share of common stock. If the current market value of common stock per share is $45, the conversion value of the bond is ________.
A) $880
B) $1,000
C) $1,125
D) $1,200

Question

Quizplus · Accepted Answer

The conversion value is the value at which the bond can be converted into common stock. To calculate the conversion value, we multiply the conversion ratio by the market price of the common stock.

Conversion ratio = par value of bond / conversion price per share of common stock
= $1,000 / $40
= 25 shares of common stock

Conversion value = conversion ratio x market price of common stock
= 25 x $45
= $1,125

Therefore, the conversion value of the bond is $1,125, and the answer is (C).

A Firm Has an Outstanding Bond with a $1,000 Par