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.

Homework Answers

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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