EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 6, Problem 2PROB
Summary Introduction
The convertible bond has a conversion ratio of 40 and a face value of $1,000.
Convertible bonds are a specific type of bonds in which the bondholders have an option to convert their bonds in to stocks. Conversion ratio determines the number of stocks given per bond. Conversion price is thus, the price to be paid for each share of stock which the investors will receive.
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Suppose you own a convertible bond that has a conversion ratio equal to 62. Each convertible bond has a face value equal to $1,000. The current market value of the company's common stock is $16, and the bond is selling for $1,042. If you want to liquidate your position today because you need money to pay your rent, should you sell the bond or should you convert the bond into common stock and then sell the stock? Explain your answer. Round your answers to the nearest dollar.
Selling the bond would generate $_______ . Converting the bond and selling the common stock would generate $_______ . Thus, it would be better to SELL THE BOND / CONVERT THE BOND INTO COMMON STOCK AND THEN SELL THE STOCK
Swift Bicycles plans to issue convertible bonds to finance its future growth. Each convertible bond has a face value equal to $1,000 and can be converted into 25 shares of common stock. What is the minimum stock price that would make it beneficial for bondholders to convert their bonds?
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