Question

A customer purchases a convertible bond at 90, convertible into the common stock at $50. The common stock is currently trading at $45. The company declares a 25% stock dividend. The bond trust indenture includes an anti-dilution clause. After the ex date for the stock dividend, the conversion price for this bond issue will be:

Answer 1

The conversion price for this bond issue after the ex date for the stock dividend will be $40

Step-by-step explanation:

Given

Old Bond Price = $50

Current Bond Price = $45

Stock Dividend = 25%

New conversion price of bond is calculated by the following:

New Conversion Price = Old Price divided by New Factor

Where Old Price = $50 and

New Factor = 100% + Stock Dividend

New Factor = 100% + 25%

New Factor = 125%

New Conversion Price = $50/125%

New Conversion Price = $50/1.25

New Conversion Price = $40

Thus, the conversion price for this bond issue after the ex date for the stock dividend will be $40