Delilah Corp. has outstanding 1000 5% bonds, issued in year 1 at their face value of...
Delilah Corp. has outstanding 1000 5% bonds, issued in year 1 at their face value of $1,000 each which currently are selling at $1,150 each. In year 3 Delilah Corp. reaches an agreement with its bondholders to issue 100 shares of stock for each bond instead of paying off the bonds at the maturity date. The stock has a fair market value of $18 per share. As a result of the above, what recognized gain must Delilah's bondholders, now shareholders, report in year 3?
| A. $60,000 long-term capital gain |
| B. $800,000 long-term capital gain |
|
C. $650,000 dividend D. $0 |
Homework Answers
| Bond Purchase price | 1000*1150 | 1150000 | |
| Less: Stock received will be | 1000*100*18 | 1800000 | |
| Gain | -650000 | ||
| Delilah's shareholders gain would be $650000 dividend | |||
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