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Conversion Price and Value

Eastern Digital Corp. has a convertible bond outstanding with a coupon rate of 9 percent and a maturity date of 20 years. It is rated Aa, and competitive, non convertible bonds of the same rick class carry a 10 percent return. The conversion ratio is 40. Currently teh common stock is selling for $18.25 per share on the New York Stock Exchange.

a. What is the conversion price?
b. What is the conversion value?
c. Compare the pure bond value. (Use semiannual analysis)
d, Draw a graph that includes the floor priced and the conversion value but not the convertible bond price. For the stock price on the horizontal axis, use 10,20,30,40,and 50.
e. Which will influence the bond price more-the pure bond value (floor value) or the conversion premium?

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Solution Preview

a. What is the conversion price?
conversion price is the price at which a given convertible security can be converted to common stock. The conversion price is specified when the security is issued. The number of shares to be received is the principal amount of the security divided by the conversion price (after the conversion price is adjusted for stock splits and dividends).
conversion price=Bond Value / conversion ...