A corporation has issued $10,000,000 of 7 1/4%, 20 year, $1,000 par, convertible debentures, convertible at a ratio of 40:1. The bond is currently trading at 120, while the company's common stock is at 24. The conversion price per share is:

Question

Emerson Montoya

Business

26 February, 23:58

A corporation has issued $10,000,000 of 7 1/4%, 20 year, $1,000 par, convertible debentures, convertible at a ratio of 40:1. The bond is currently trading at 120, while the company's common stock is at 24. The conversion price per share is:

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Answers (1)

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Kamryn · Answer 1

The conversion price per share is $25.25

Explanation:

The conversion price per share is is given as market price value divided by conversion ratio.

In this scenario market value is $1000*101/100=$1010 while the conversion ratio 40:1

Hence conversion price=$1010 / (40/1)

which can be written $1010*1/40=$25.25

As result the conversion price per share is $25.25

It is assumed that the bondholders bought the shares at $25.25 per share against holding on their debt instrument that only guarantees payment of coupon interest and eventual redemption of initial amount invested