Question

Rob Stevens is the chief executive officer of Isner Construction, Incorporated, and owns 1,080,000 shares of stock. The company currently has 7.3 million shares of stock and convertible bonds with a face value of $41.30 million outstanding. The convertible bonds have a conversion price of $39.30 and the stock is currently selling for $46.30.

a. What percentage of the firm's common stock does Rob own? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b. If the company decides to call the convertible bonds and force conversion, what percentage of the firm's common stock will Rob own? He does not own any convertible bonds. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Rob Stevens owns approximately 14.79% of Isner Construction's common stock. If the convertible bonds are called and force conversion, his percentage of ownership would be approximately 12.94%.

Step-by-step explanation:

To answer part (a), we need to calculate the percentage of Isner Construction's common stock that Rob Stevens owns. Given that Rob owns 1,080,000 shares and there are 7,300,000 shares outstanding, the calculation is as follows:

Rob's ownership percentage = (Rob's shares ÷ Total shares) × 100

Rob's ownership percentage = (1,080,000 ÷ 7,300,000) × 100 ≈ 14.79%

For part (b), we need to establish how many shares would be created through the conversion of the convertible bonds. The convertible bonds can be converted at a price of $39.30 per share. The total conversion would create:

New shares from bonds = Face value of bonds ÷ Conversion price

New shares from bonds = $41,300,000 ÷ $39.30 ≈ 1,051,150 new shares

After conversion, the total shares outstanding would be the original shares plus the new shares from bond conversion:

Total shares after conversion = 7,300,000 + 1,051,150 = 8,351,150

Rob's ownership percentage after conversion = (Rob's shares ÷ Total shares after conversion) × 100

Rob's ownership percentage after conversion = (1,080,000 ÷ 8,351,150) × 100 ≈ 12.94%