Question

# BUZZ Corp. has a convertible bond issue outstanding. Each bond, with a face value of \$1,000,...

BUZZ Corp. has a convertible bond issue outstanding. Each bond, with a face value of \$1,000, can be converted into common shares at a rate of 73.2512 shares of stock per

\$1,000 face value bond (the conversion rate), or \$13.651 per share. BUZZ’s common stock is trading (on the NYSE) at \$14.90 per share and the bonds are trading at \$972.

Calculate the conversion value of each bond.

1. Determine if it is currently profitable for bond holders to
2. convert their bonds into shares of BUZZ common stock.

a.         If a bond holder were to convert BUZZ Corp bonds into stock, each bond (worth \$972) could be exchanged for 73.2512 shares of stock worth \$14.90. The conversion value of the bonds is: \$14.90x73.2512 = \$1091.4429

b.         The bonds are currently worth \$972 per bond, while their conversion value is \$1091.4429. Thus, the conversion of the debt to stock would result in a profit of \$119.4429 (\$1091.4429 - \$972) in dollar value for the investor.if he or she holds debt is better to opt conversion.

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