Investors perceive the benefits of these two sources

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Unformatted text preview: ue and conversion (or stock) value are nearly equal. Investors perceive the benefits of these two sources of value to be greatest at this point. Review Questions 16–6 What is the conversion feature? What is a conversion ratio? How do convertibles and other contingent securities affect EPS? Briefly describe the motives for convertible financing. 16–7 When the market price of the stock rises above the conversion price, why may a convertible security not be converted? How can the call feature be used to force conversion in this situation? What is an overhanging issue? 690 PART 6 Special Topics in Managerial Finance FIGURE 16.1 1,600 Value of Convertible Bond ($) Values and Market Premium The values and market premium for Duncan Company’s convertible bond Market Value 1,400 Conversion Value Market Premium 1,200 Straight Bond Value 1,000 800 X 600 400 200 0 10 20 30 40 50 60 70 80 Price per Share of Common Stock ($) 90 16–8 Define the straight bond value, conversion (or stock) value, market value, and market premium associated with a convertible bond, a...
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