Question
In: Accounting
When bondholders decide to exercise their convertible bonds, the company values the common stock at the...
When bondholders decide to exercise their convertible bonds, the company values the common stock at the ____________.
A. par value of the stock
B market value of the stock
C. carrying value of the bonds
D. par value of the bonds
Solutions
Expert Solution
The answer is B- Market Value of the Stock
A convertible bond gives the bondholder the right to convert the bond into a fixed number of shares of common stock in the issuing company.
Company ABC bond with a $2,000 par
value that is convertible into Company ABC common stock. It has a
coupon of 6%, payable annually. The bond’s prospectus specifies a
conversion ratio, which is the number of shares that the investor
will receive if he chooses to convert. In this example, Company
ABC's convertible bond has a conversion ratio of 20. The investor
is effectively purchasing 20 shares of Stock ABC for $100 per share
($2000 / 20 = $100).
The bondholder keeps the bond for two years and collects a $120 interest payment each year. At the end of year two, he elects to convert his bond into 20 shares of stock. By this time, the stock price has risen to $150 per share. The bondholder converts his bond to 20 shares at $150 per share, and now his investment is worth $3000.
ekkarill92 answered 2 weeks agoRelated Solutions
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When issuing convertible bonds or bonds with warrants attached, the company can change the exercise price...
When issuing convertible bonds or bonds with warrants attached, the
company can change the exercise price of the (embedded) warrants.
If it increases the exercise price, will the cost of debt go up or
down? Explain the effect step by step, thus what happens to the
Time Value Premium if it increases the exercise price, then explain
the impact of the Time Value Premium on…, etc.
When issuing convertible bonds or bonds with warrants attached, the company can change the exercise price...
When issuing convertible bonds or bonds with warrants
attached, the company can change the exercise price of the
(embedded) warrants. If it increases the exercise price, will the
cost of debt go up or down? Explain the effect step by step, thus
what happens to the Time Value Premium if it increases the exercise
price, then explain the impact of the Time Value Premium on…,
etc.
When issuing convertible bonds or bonds with warrants attached, the company can change the exercise price...
When issuing convertible bonds or bonds with warrants
attached, the company can change the exercise price of the
(embedded) warrants. If it increases the exercise price, will the
cost of debt go up or down? Explain the effect step by step, thus
what happens to the Time Value Premium if it increases the exercise
price, then explain the impact of the Time Value Premium on…,
etc.
A company issued convertible bonds at $1,000 par value. Bondholders can exchange the bond for 25...
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A bond is convertible into common stock for $50. If the company announces a 50% stock...
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$22.22
$33.33
$18.18
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