Hilton Hotels Corp. has a convertible bond issue outstanding. Each bond, with a face value of...
Hilton Hotels Corp. has a convertible bond issue outstanding.
Each bond, with a face value of $1,100, can be converted into
common shares at a rate of 61.2984 shares of stock per $1,100 face
value bond (the conversion rate), or $17.9450 per share. Hilton’s
common stock is trading (on the NYSE) at $17.53 per share and the
bonds are trading at $1,075.
a. Calculate the conversion value of each bond.
(Round your answer to 2 decimal places. (e.g.,
32.16))
b. State whether it is currently profitable for
bond holders to convert their bonds into shares of Hilton Hotels
common stock.
Homework Answers
a. The conversion value of bond is computed as shown below:
= Number of shares in which each bond can be converted x current price of stock
= 61.2984 x $ 17.53
= $ 1,074.56 Approximately
b. Since the bond is trading at a value higher than the conversion value that we had computed above, hence it is not currently profitable for bond holders to convert their bonds into shares of Hilton Hotels common stock.
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