Question

______     6.      Similar to the example in class, assume that a firm has 250,000 shares of common stock outstanding and 5,000 convertible bonds, each with a face of $1,000. Each convertible bond can convert into 25 shares of common stock. Assume that the firm value at the maturity date of the convertible bond is $12,500,000. Based on this firm value, will the convertible bondholders be better off converting into common stock or not converting (and therefore receiving just the face amount of $1,000 per bond)? (As in class, assume the firm does not have any other debt other than the convertible bond and the amount owning to the convertible bondholders at the maturity date is the face amount of $1,000 per bond.)

Answer 1