Question

Hilton Hotels Corp. has a convertible bond issue outstanding. Each bond, with a face value of...

Hilton Hotels Corp. has a convertible bond issue outstanding. Each bond, with a face value of $1,500, can be converted into common shares at a rate of 61.2992 shares of stock per $1,500 face value bond (the conversion rate), or $24.4701 per share. Hilton’s common stock is trading (on the NYSE) at $24.05 per share and the bonds are trading at $1,475.

a. Calculate the conversion value of each bond. (Round your answer to 2 decimal places. (e.g., 32.16))
b. State whether it is currently profitable for bond holders to convert their bonds into shares of Hilton Hotels common stock.

a. Conversion value
b. Exercise the conversion option
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Answer #1

Part a:

Conversion value of each bond is calculated as:
Trading price of common stock*Conversion rate
Trading price of the common stock=$24.05 per share
Each bond can be converted to shares at 61.2992 shares per $1500 face value bond. This is the conversion rate.

Conversion value of each bond=$24.05*61.2992=$1474.24576 or $1474.25 (Rounded up to two decimal places)

Part b:
Current trading price of bonds=$1,475 per bond
Conversion value of each bond=$1474.25
Conversion value is less than the current trading price of the bonds. So, it is not profitable for bond holders to convert their bonds.

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