Chapter 16 conversion or stock value the value of a

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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 contingent securities Convertibles, warrants, and stock options. Their...
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This document was uploaded on 01/19/2014.

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