Chapter 5: Q6BP (page 624)

O’Reilly Moving Company has a $1,000 par value convertible bond outstanding that can be converted into 20 shares of common stock. The common stock is currently selling for $43.10 a share, and the convertible bond is selling for $900.00.
a. What is the conversion value of the bond?
b. What is the conversion premium?
c. What is the conversion price?

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Answer

Step by step solution

$C o n v e r s i o n v a l u e = S t o c k \times N u m b e r o f S h a r e s = $ 43.10 \times 20 = $ 860$

$C o n v e r s i o n p r e m i u m = B o n d p r i c e - C o n v e r s i o n v a l u e = $ 900 - $ 862 = $ 38$

$C o n v e r s i o n p r i c e = \frac{C o n v e r t i b l e b o n d p a r v a l u e}{N u m b e r o f s h a r e s} = \frac{$ 1, 000}{20} = $ 50$

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Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	\(8,500,000

Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	$8,500,000