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A $1,000 face value bond has a conversion ratio of 38 . You estimate the transaction costs of conversion to be 3.5% of the face value of the bond. What price must the stock reach in order for you to convert? The required price per share will be $. (Round to the nearest cent.)

User Shylent
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Final answer:

To calculate the break-even stock price for bond conversion, one must account for the conversion ratio and transaction costs. A bond with a $1,000 face value and a conversion ratio of 38, along with a 3.5% transaction cost, yields a break-even stock price of $25.39 per share. This is the price at which it would make financial sense to convert the bond into stock.

Step-by-step explanation:

To determine the stock price at which conversion of a bond into stock would be worthwhile, one must consider the conversion ratio, transaction costs, and the face value of the bond. With a conversion ratio of 38 and a $1,000 face value bond, we can initially calculate that upon conversion, an investor would receive 38 shares of stock. However, with transaction costs amounting to 3.5% of the face value, there is an additional cost incurred of $1,000 * 0.035 = $35. This cost reduces the benefit of conversion, so one must also consider this in the calculation to find the break-even stock price.

Thus, the total amount received for each share upon conversion is $1,000 - $35 = $965, which is then divided by the conversion ratio of 38 to find the minimum stock price necessary to break even. This yields a price of $965 / 38 = $25.39 per share, which is the price that the stock must reach for an investor to consider conversion as a financially viable option. The investor would then consider rounding this to the nearest cent if necessary, which results in a required price per share of $25.39.

Note that this question focuses on the decision-making process for converting a bond into stock, rather than investing in a bond with an interest rate lower than the market interest rate, which is the concept briefly discussed in the provided reference information.

User Mgottsch
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