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

To determine the value of the shares received upon conversion, we need to use the conversion ratio, which is the face value of the bond divided by the conversion price. In this case, the conversion price is $7.50, so the conversion ratio is $10,000/$7.50 = 1,333.33 shares.

To find the value of these shares, we multiply the number of shares by the stock price: 1,333.33 x $7.65 = $10,246.50.

Since the stock price is higher than the bond's call price of $1,000 per $1,000 face value, it is most likely that the company will call the bonds. Therefore, the holder of the bond would be best off converting the bond and accepting shares with a value of $10,246.50.

A Firm Issues the Convertible Debt Shown Above