Chapter 5: Q7BP (page 451)

The bonds of Goniff Bank & Trust have a conversion premium of $90. Their conversion price is $20. The common stock price is $16.50. What is the price of the convertible bonds?

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Answer

The price of the convertible bond of the company is $915.

Step by step solution

$C o n v e r s i o n r a t i o = \frac{P a r v a l u e}{C i n v e r s i o n p r i c e} = \frac{$ 1, 000}{$ 20} = 50$

$C o n v e r s i o n v a l u e = C o m m o n s t o c k p r i c e \times C o n v e r s i o n r a t i o = $ 16.50 \times 50 = $ 825$

$C o n v e r t i b l e b o n d p r i c e = C o n v e r s i o n v a l u e + C o n v e r s i o n p r e m i u m = $ 825 + $ 90 = $ 915$

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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