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Unformatted text preview: TER 16 conversion (or stock) value
The value of a convertible
security measured in terms of the
market price of the common
stock into which it can be
converted. EXAMPLE Hybrid and Derivative Securities 685 Conversion (or Stock) Value
The conversion (or stock) value is the value of the convertible measured in terms
of the market price of the common stock into which it can be converted. The conversion value can be found simply by multiplying the conversion ratio by the current market price of the firm’s common stock.
McNamara Industries, a petroleum processor, has outstanding a $1,000 bond
that is convertible into common stock at $62.50 a share. The conversion ratio is
therefore 16 ($1,000 ÷ $62.50). Because the current market price of the common
stock is $65 per share, the conversion value is $1,040 (16
$65). Because the
conversion value is above the bond value of $1,000, conversion is a viable option
for the owner of the convertible security. Effect on Earnings
Convertibles, warrants, and
stock options. Their...
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This document was uploaded on 01/19/2014.
- Fall '13