Sherwood Forest Products has a convertible bond quoted on the NYSE bond market a

Question

Sherwood Forest Products has a convertible bond quoted on the NYSE bond market at 95. (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 7.00 percent. The conversion ratio is 25, and the common stock is currently selling for $32 per share on the NYSE.

Compute the conversion premium. (Do not round intermediate calculations and round your answer to 2 decimal places.)

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.)

Compute the conversion premium. (Do not round intermediate calculations and round your answer to 2 decimal places.)

Explanation / Answer

QUOTED PRICE OF BOND=$950

CONVERSION RATIO=25 I.E 25 COMMON STOCK IN EXCHANGE FOR 1 BOND

CURRENT SELLING PRICE OF COMMON STOCK=$32

a)CALCULATION OF CONVERSION PREMIUM

CONVERSION PREMIUM=PRICE OF CONVERTIBLE SECURITY-CURRENT MARKET VALUE OF COMMON STOCK INTO WHICH IT IS TO BE CONVERTED

=$950-25*$32

=$950-$800

=$150

b)PRICE AT WHICH COMMON STOCK NEEDS TO SELL FOR THE CONVERSION VALUE TO BE EQUAL TO THE CURRENT BOND PRICE=$950/25=$38

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