Question

Skylar, the CEO of a publicly traded accounting firm, has recently issued convertible debentures. The debentures have the following characteristics:

-Par value of $1,000
-Callable at 108% of par
-Convertible at a price of $40/share (common stock is currently trading at $55/share)

Skylar's company:

	a.	has no desire or reason to call the convertibles
	b.	could force conversion by calling the issue
	c.	could realize a $15/share gain by calling the convertibles
	d.	cannot get the convertible holders to convert if they called the debt

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Converting or not is the wish of the holders and not Company, the company cannot force to convert the bonds but they can create an environment where it's desirable to convert to stock.

a. It has desire to convert because

Market value = (1000/40)*55 = 1,375.

Call value = 1000*108% = 1080.

b.

cannot force conversion by calling the issue.

c. Gain = (1375-1080)/25 = $11.8

d. It cannot get convertible holders to convert if they called the debt.

Because:

Call value = 1080

But Conversion value = 1000.  

So as Conversion value is less, it cannot get convertible holders to convert.

Answer: D.