Question

"The conversion ratio of these convertible debentures is set at issuance at 200:1. The trust indenture for the debentures includes an "anti-dilutive" covenant. The company wants to issue 50,000 additional common shares. The conversion price after the issuance of the additional common shares will be:"

Answer 1

Answer:

$4

Explanation:

The conversion price of the convertible bonds set at issuance was $5 per share ($1000 par/200 conversion ratio). If the company issues more common shares, the market value of outstanding shares will fall. For instance, if the common stock price is trading at $5, Therefore, the bond and the common are at parity. If 25% more share isnissued by the company as it does in the aforementioned example -- there would be $1000000 share of common at $5 par or 200000 shares outstanding and the company intends to share 50000 more  shares, or 25% more), the adjusted conversion price of the stock after issuance will now become $5/1.25 = $4 per share.

Nonetheless, i the conversion isn't being adjusted, the convertible security which was  "at the money" goes "out the money". The protect convertible security holders, an anti-dilutive covenant is included in the trust indenture. The conversion price is adjusted for these dilutive effects. The new conversion pricewill be $5 original price/1.25 = $4