Sherwood Forest Products has a convertible bond quoted on the NYSE bond market at 100. (Bond...
Sherwood Forest Products has a convertible bond quoted on the NYSE bond market at 100. (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 8.00 percent. The conversion ratio is 20, and the common stock is currently selling for $28 per share on the NYSE.
a. Compute the conversion premium. (Do not round intermediate calculations and round your answer to 2 decimal places.)
b. At what price does the common stock need to sell for the conversion value to be equal to the current bond price? (Do not round intermediate calculations and round your answer to 2 decimal places.)
Homework Answers
First calculate the bond price = 100% × $1000 par value
=$1000 bond price
Conversion value = conversion ratio × Current stock price
Current bond price = (conversion ratio × Current stock price) + Conversion premium
a.$28 common stock price × 20 shares = $560 conversion value
$1000 bond price – $560 = $440 conversion premium
b.$1000 bond price/20 shares = $50 stock price where conversion value and bond price $1000 are equal.
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