Question

Plunkett Gym Equipment Inc. has a $1,000 par value convertible bond outstanding that can be converted...

Plunkett Gym Equipment Inc. has a $1,000 par value convertible bond outstanding that can be converted into 35 shares of common stock. The common stock is currently selling for $30.00 a share, and the convertible bond is selling for $1,071.70.


a. What is the conversion value of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places.)


b. What is the conversion premium? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  



c. What is the conversion price? (Do not round intermediate calculations and round your answer to 2 decimal places.)

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Homework Answers

Answer #1

Given:

Par Value of bond - $1000 Conversion Ratio - 35:1

Market Price of share - $30 Market Price of convertible bond - $1071.70

a.Conversion value of bond = Market price of each share x Number of shares for each bond

= $30 x 35= $1050

b.Conversion Premium = Market Value of convertible bond - Conversion value of bond

= $1071.70 - $1050 = $21.70

Premium in percentage = Conversion premium/Conversion value of bond x 100

=$21.70/$1050 = 2.0666% or 2.07%

c.Conversion Price of share - It is the price at which premium is zero.

= Market Value of Bond/Number of shares per bond

= $1071.70/35 = $30.62

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