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15 February, 13:32

A customer purchases a convertible bond at 90, convertible into the common stock at $50. The common stock is currently trading at $45. The company declares a 25% stock dividend. The bond trust indenture includes an anti-dilution clause. After the ex date for the stock dividend, the conversion price for this bond issue will be:

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  1. 15 February, 13:47
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    The conversion price for this bond issue after the ex date for the stock dividend will be $40

    Explanation:

    Given

    Old Bond Price = $50

    Current Bond Price = $45

    Stock Dividend = 25%

    New conversion price of bond is calculated by the following:

    New Conversion Price = Old Price divided by New Factor

    Where Old Price = $50 and

    New Factor = 100% + Stock Dividend

    New Factor = 100% + 25%

    New Factor = 125%

    New Conversion Price = $50/125%

    New Conversion Price = $50/1.25

    New Conversion Price = $40

    Thus, the conversion price for this bond issue after the ex date for the stock dividend will be $40
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