A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $4.95.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

According to the convertible bond, the conversion ratio is 1622. This means that for every bond of face value $10,000, the holder can convert it into 1622 shares of common stock.

To determine the value of the shares that the holder would receive upon conversion, we need to multiply the conversion ratio by the market price per share on the conversion date (which is July 1, 2008 in this case).

So, the value of shares that the holder would receive upon conversion is: 
1622 x $6.325 = $10,246.50

This is higher than the face value of $10,000, which means that the holder would choose to convert the bond and accept shares with a value of $10,246.50 rather than accepting the call price of $10,000.

Therefore, the best choice is C.

A Firm Issues the Convertible Debt Shown Above