Chapter 6, Problem 1PROB

Summary Introduction

The convertible bonds have a face value of $1,000 which can be converted into 25 common shares.

Convertible bonds or debenture is a type of bond which has the option of converting the bonds to common shares. Each share price or the conversion price is determined by the face value of the bond and the conversion ratio.

Conversion ratio is the number of shares which the investor will receive per bond, whereas, conversion price is the price which is paid for obtaining each stock by converting the bond.

Conversion price could be calculated as follows:

$\text{Conversion Price}=\frac{\text{Price of the bond}}{\text{Conversion ratio}}$

Explanation of Solution

Calculate the conversion price or the market price of the stock as below:

$\begin{array}{c}\text{Conversion Price}=\frac{\text{Price of the bond}}{\text{Conversion ratio}}\\ =\frac{1000}{25}\\ =\boxed{\$40}\end{array}$

Therefore, the minimal stock price that would be beneficial for stockholders to convert their bonds is $\boxed{\$40}$.