Answer:
$36
Step-by-step explanation:
Step 1
We find the number of shares the bond is convertible into. This means we find the conversion ratio.
Conversion ratio formula =
Par value/ Bond conversion price
Par value = $1,000
Bond conversion price = 25
Conversion ratio = $1,000/25
= 40 shares.
Step 2
The parity price of the stock is calculated as:
Rate of the convertible debenture (in dollars/ Conversion ratio
In the above question, rate of convertible debenture = 90
converting to dollars = 90 × $10
= $900
Conversion ratio = 40 shares
Parity price of stock = $900/40 shares
= $36