Hilton Hotels Corp. has a convertible bond issue outstanding. Each bond, with a face value of...

Hilton Hotels Corp. has a convertible bond issue outstanding. Each bond, with a face value of $1,400, can be converted into common shares at a rate of 61.3002 shares of stock per $1,400 face value bond (the conversion rate), or $22.8384 per share. Hilton’s common stock is trading (on the NYSE) at $22.42 per share and the bonds are trading at $1,375.

a. Calculate the conversion value of each bond. (Round your answer to 2 decimal places. (e.g., 32.16))
b. State whether it is currently profitable for bond holders to convert their bonds into shares of Hilton Hotels common stock.


a.	Conversion value
b.	Exercise the conversion option

Solutions

Expert Solution

(A) Calculation of Conversion value

Concersion value = Conversion Ratio * Current Share price

= 61.3002 * $22.42

= $1,374.35

Note: Conversion value means is the amount an investor would received if a convertible security is changed (converted ) into common stock. This value is arrived at by multiplying the conversion ratio (how many shares received per bond) by the current market price of the common stock.

(B) Exercise the conversion option

In the given case of Hilton Hotels Corp it is not profitable to convert because the conversion value is lower than the current bond price.

The investor is better off by keeping the bond since the bond price of $1375 is higher than the value of the shares received on conversion.

Summery: Conversion value is $1,374.35

Current Bond price is $1,375

Exercise the conversion option an expamle is an asset that can undergo conversion is a convertible bond.The bondholder will exercise the option when the total value of the shares received from conversion exceeds the bond's worth.

jeff jeffy answered 1 year ago

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