Multiple Choice Question Assume a $1,000 debenture with a conversion price of S5
ID: 1171412 • Letter: M
Question
Multiple Choice Question
Assume a $1,000 debenture with a conversion price of S50. The company has 1,000 shares outstanding of common stock with a current market price of $50, which is also the price at the record date. The company issues 200 new shares of common stock at $40 per share. The debenture has a conversion price adjustment mechanism that fully protects the bondholder's rights in the event of a dilutive common stock offering. What should be the new adjusted conversion price (to the nearest cent, e.g., "S00.00") (please note that due to rounding to the nearest tenth of a decimal, the answer may be a few cents off from the precise answer; please provide the most correct answer from the choices below)? What is the new conversion ratio (to the nearest one hundredth in decimal, e.g. "00.00")? A. Adjusted conversion price -$48.87 Conversion ratio 20.96 . Conversion ratio 22.65 Conversion ratio 19.79 .. Conversion ratio 20.51 Conversion ratio - 20.69 B. Adjusted conversion price 47.45 C. Adjusted conversion price- $48.52 D. Adjusted conversion price $51.33 E. Adjusted conversion price -$48.33Explanation / Answer
Prevailing Market Price = $ 50 and Initial number of outstanding shares = N = 1000
Initial Market Capitalization = 50 x 1000 = $ 50000
New issue price = $ 40 and Additional number of shares issued = 200
Additional Market Capitalization = 40 x 200 = $ 8000
Total Market Capitalization = 50000 + 8000 = $ 58000
Total no. of shares outstanding after new share issue = 1000 + 200 = 1200
New Fair Price per share = 58000 / 1200 = $ 48.33
In order to protect convertible debenture holder's right upon price dilutive share issue action, the adjusted conversion price needs to be equal to atleast the adjusted conversion price.
Hence, new adjusted conversion price = $ 48.33
Debenture value = $ 1000
New Conversion Ratio = 1000 / 48.33 = 20.69
Hence, the correct option is (E).
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