Question

Slater Mines just called its outstanding bonds at a call price of $1,025. The bonds have a conversion price of $33.33 and a par value of $1,000. The stock price is currently $33.10. In response to this call, what should the bondholders do and why? If the conversion price changes to $32.05, what should the bondholders do and why? At what conversion price would the bondholder be indifferent to letting the bond be called and converting the bond to common stock? If the conversion price was the original $33.33, what market price for the stock would make bondholders indifferent as to whether or not the bonds are called or converted to common stock? Please show all your work.

Answer 1

When Conversion price is $33.33

Number of shares (if bonds are converted) = par value/conversion price = 1,000/33.33 = 30 shares

Current value of 30 shares = 30*current share price = 30*33.10 = $993.10

Call price is of $1,025 is greater than the current value of converted bonds $993.10, so bondholders should accept the call

When Conversion price is $32.05

Number of shares (if bonds are converted) = 1000/32.05 = 31.20

Current value of those shares = 31.20*33.10 = $1032.72

Call price is of $1,025 is less than  than the current value of converted bonds $1032.72, so bondholders should not accept the call

At what conversion price would the bondholder be indifferent to letting the bond be called and converting the bond to common stock?

Let the conversion price be x

For being indiferrent Value of common stock being offered must be equal to value of bond

1000/x * 33.10 = 1025

1000/x = 30.97

X = $ 32.29

At this conversion price the bond and the stock will have same value so the the bondholder will be indifferent to letting the bond be called and converting the bond to common stock

If the conversion price was the original $33.33, what market price for the stock would make bondholders indifferent as to whether or not the bonds are called or converted to common stock?

Number of shares (if bonds are converted) = 1,000/33.33 = 30 shares

Call price = 1025

value of bond is 1025 when share price is $ 34.17 (1025/30)

So  If the conversion price was the original $33.33, at market price for the stock $34.17 would make bondholders indifferent as to whether or not the bonds are called or converted to common stock .