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Unformatted text preview: Wear Company, a manufacturer of denim products, has outstanding a
bond that has a $1,000 par value and is convertible into 25 shares of common
stock. The bond’s conversion ratio is 25. The conversion price for the bond is
$40 per share ($1,000 25).
2. Sometimes, instead of the conversion ratio, the conversion price is given. The
conversion ratio can be obtained by dividing the par value of the convertible
by the conversion price. EXAMPLE Mosher Company, a franchiser of seafood restaurants, has outstanding a convertible 20-year bond with a par value of $1,000. The bond is convertible at $50
per share into common stock. The conversion ratio is 20 ($1,000 $50).
The issuer of a convertible security normally establishes a conversion ratio or
conversion price that sets the conversion price per share at the time of issuance
above the current market price of the firm’s stock. If the prospective purchasers
do not expect conversion ever to be feasible, they will purchase a straight security
or some other convertible issue. CHAP...
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This document was uploaded on 01/19/2014.
- Fall '13