Conversion Example FunFinMan, Inc. has an issue of 8% $100 par value preferred stock outstanding. The security has a conversion price of $30 per share What is the conversion ratio? Conversion Ratio $100 par value /$30 conversion price 3.33 shares 22-6
22-6 FunFinMan, Inc., has an issue of 8%, $100 par value preferred stock outstanding. The security has a conversion price of $30 per share. What is the conversion ratio? Conversion Example Conversion Ratio = $100 par value / $30 conversion price = 3.33 shares
Antidilution and the Convertible securit Conversion terms are not necessarily constant over time Example: The conversion price on 20-year convertible-debt might step-up?over time from $30 during the first 5 years, $35 the next 5 years, and $40 for thethe remaining 10 years until maturity The conversion price is usually adjusted for any stock splits or stock dividends to protect the convertible bondholder from antidilution (known as the antidilution clause) 22-7
22-7 Antidilution and the Convertible Security Conversion terms are not necessarily constant over time. Example: The conversion price on 20-year convertible-debt might step-up?over time from $30 during the first 5 years, $35 the next 5 years, and $40 for the the remaining 10 years until maturity. The conversion price is usually adjusted for any stock splits or stock dividends to protect the convertible bondholder from antidilution (known as the antidilution clause)
Conversion value Conversion value The value of the convertible security in terms of the common stock into which the security can be converted. It is equal to the conversion ratio times the current market price per share of the common stock For example, if the market value per share of common stock in Fun FinMan, Inc., were trading at $42 per share, then the conversion value is 3. 33 shares x $42=$140 per share of preferred stock 22-8
22-8 Conversion Value -- The value of the convertible security in terms of the common stock into which the security can be converted. It is equal to the conversion ratio times the current market price per share of the common stock. Conversion Value For example, if the market value per share of common stock in FunFinMan, Inc., were trading at $42 per share, then the conversion value is: 3.33 shares x $42 = $140 per share of preferred stock
Premium over Conversion value Premium over Conversion value - The market price of a convertible security minus it conversion value: also called conversion premium. For example, if the market value per share of preferred stock in FunFinMan, Inc,were trading at $154 per share, then the conversion premium Is. $154-$140=$14 premium per share of preferred stock (or a 10% premium) 22-9
22-9 Premium Over Conversion Value -- The market price of a convertible security minus it conversion value; also called conversion premium. Premium Over Conversion Value For example, if the market value per share of preferred stock in FunFinMan, Inc., were trading at $154 per share, then the conversion premium is: $154 - $140 = $14 premium per share of preferred stock (or a 10% premium)