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.
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Answer #1

Answer:

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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