Nickles Mining recently issued convertible bonds. Each convertible bond has a fa

Question

Nickles Mining recently issued convertible bonds. Each convertible bond has a face value equal to $1,000 and can be converted into 50 shares of common stock.

a. What would be the minimum price of the stock that would make it beneficial for bondholders to convert their bonds? Ignore the effects of taxes or other costs.

b. Suppose that the bond also has a call provision, which Nickles just exercised. The call price is $1,100. If the company's stock is currently selling for $20.50, should investors convert their bonds into common stock or redeem them for cash?

Explanation / Answer

Face value of the bond = $1000 and each convertible bond can be converted into 50 common stock.

a) The minimum price of the stock to accept the conversion of the bond into shares is = $1000/50 = $20 per share

b) On conversion of the bond into shares, the value of bond is = $20.50/share * 50 shares = $1025 per bond

The current call price is = $1100 per bond

As the call price is more than the conversion value, so investors should redeem their bonds for cash.

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