Question

A customer purchases a convertible bond at 90, convertible into the common stock at $40. The common stock is currently trading at $36. The company declares a 25% stock dividend. The bond trust indenture includes an anti-dilution clause. After the ex date for the stock dividend, the conversion price for this bond issue will be:________.

Answer 1

$32

Step-by-step explanation:

Given:

Common stock price = $40

Current trading price = %36

Stock dividend = 25 % = 25/100 = 0.25

Conversion price = ?

Computation of conversion price :

Conversion price = Common stock price / (1 + Stock dividend)

= $40 / (1 + 0.25)

= $40 / 1.25

Conversion price = $32

Therefore , new Conversion price is $32.