Question

Sherwood Forest Products has a convertible bond quoted on the NYSE bond market at 95. (Bond...

Sherwood Forest Products has a convertible bond quoted on the NYSE bond market at 95. (Bond quotes represent the percentage of par value. Thus, 70 represents $700, 80 represents $800, and so on.) It matures in 10 years and carries a coupon rate of 5.50 percent. The conversion ratio is 25, and the common stock is currently selling for $33 per share on the NYSE.

a. Compute the conversion premium.

at what price does the common stock need to sell for the conversion value to be equal to the current bond price?

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Answer #1

Answer:

Premium : $125

The common stock price for equal value = $38

Calculation:

Conversion Premium = [ Current price of bond - (Current stock price * conversion ratio)]

Conversion Premium = [ 950 - (33*25)]

= $125.

To Equalize Current price of bond and conversion value

The current price of bond =  Current stock price * conversion ratio

The current price of the bond is $950 and the Conversion ratio is 25. We need to find the value of the current stock price.

950 = Current stock price * 25

Current stock price = 950/25 = $38 per share

Do let me know if you need more clarification in any step.

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