Skip to main content

What is Conversion Ratio, Conversion Value and Conversion Premium?

 Convertible Security: These are securities that convert into common stock with specified time period Convertible securities are convertible bond and convertible preference share. Convertible bond has a facility to convert it to shares. So, the interest rate is low in comparison to non-convertible bond.

What is Conversion Ratio?

Conversion Ratio: It refers the number of shares a convertible security holder receives after converting its security to shares.

Formula:

Conversion ratio = P/CP

Where,

P = Par value of bond

CP = Conversion price

Conversion Price: It is a price of per shares given to convertible security holder in exchange of shares.

Formula:

Conversion Price = P/CR

Where,

P = Par value of bond

CR = Conversion Ratio

Conversion Value: It is the value of share price an investor receives after converting the bond or preference shares into common shares.

Formula:

Conversion Value = CR* Ps

Where,

CR = Conversion Ratio

Ps=Price per Share

Conversion Premium: Conversion premium is the excess of bond price against conversion value. Higher the premium, it is better for the investor.

Formula:

Conversion Premium = Pb-CV

Where,

Pb = Current Price of Bond

CV =Conversion Value

Example: Convertible bond has Rs.1000 face value and the current market value is Rs.990 per share. The conversion price is Rs.45 per share. The stock price is Rs.50 per share. How many shares are given i exchange of convertible bond.

Solution: In this question you have to calculate the conversion ratio to determine the number of shares.

Conversion ratio = Par value/Conversion Price

= 1000/45

=22 shares

Example: Convertible bond has Rs.1000 face value and the current market value is Rs.1100 per share. The conversion ratio is 20 shares. The stock price is Rs. 32.60 per share. What is the per share price of conversion shares.

Solution: In this question you have to calculate the conversion price to determine the price of per share.

Conversion Price = Par value/Conversion Ratio

= 1000/20

=Rs.50 per share

Example: Convertible bond has Rs.1000 face value and the current market value is Rs.1080 per share. The conversion price is Rs.35 per share. The stock price is Rs. 50 per share. What is the value of conversion?

Solution: Conversion ratio = Par value/Conversion Price

=1000/35

= 29 shares

 Conversion Value = Conversion Ratio* Current Stock Price

= 29*50

=Rs. 1450

Example: Convertible bond has Rs.1000 face value and the current market value is Rs.1780 per share. The conversion price is Rs.28 per share. The stock price is Rs. 42 per share. Find out how much shares an investor gets in exchange of convertible bond and the conversion premium?

Solution: Conversion ratio = Par value/Conversion Price

=1000/28

= 36 shares

Conversion Value = Conversion Ratio* Current Stock Price

= 36*42

=Rs.1512

Conversion Premium = Bond current price –Conversion Value

= 1780-1512

= Rs.268

Investor gets 36 shares in exchange of 1 convertible bond. The conversion value is Rs. 1512.  It means the investor gets Rs.1512 amount after converting the bond to shares. Conversion premium shows the excess amount of bond price traded in market.

 

 

 

 

Comments

Post a Comment

Popular posts from this blog

How to calculate Cost of Preference Share Capital?

Cost of Preference Share Capital:  An amount paid by company as dividend to preference shareholder is known as Cost of Preference Share Capital. Preference share is a small unit of a company’s capital which bears fixed rate of dividend and holder of it gets dividend when company earn profit. Dividend payable is not a tax deductible amount. So, there is no tax adjustments required for comparing with cost of debt. Formula for Cost of Preference Share: Irredeemable Preference Share Redeemable Preference Share K p  = Dp/NP K p  = D p +((RV-NP)/n )/ (RV+NP)/2 Where, K p  = Cost of Preference Share D p  = Dividend on preference share NP = Net proceeds from issue of preference share (Issue price – Flotation cost) RV = Redemption Value N = Period of preference share Example:  A company issues 20,000 irredeemable preference share at 8% whose face value is Rs.50 each at 4% discount. Find out the Cost of ...
88 comments
Read more

What is the difference between Cheque book and Pass book?

 Cheque book is issued by bank in customers / account holder request. With the help of this book account holder can withdraw cash from his/her account. Bank does not charge any fee to issued cheque book to its customer. But afterward bank charges some amount for using bank facility like cheque book, Debit card etc.So, Automatic some definite amount deducted from customer bank account. Pass book is  also issued by bank to its customer. It helps to record all the bank related activity according to date that is withdrawal and deposit. It is recorded by bank but the book is kept by customer to know the current balance of  his /her account.  Point of difference Pass book Cheque book What is the meaning of pass book and cheque book? Passbook is a book in which all withdrawal and deposit against customer account is recorded.   Cheque book is a book of cheques which are used to withdrawal the money to b...
Post a Comment
Read more

Numericals with solutions of Net income Approach

Net income approach questions and answers:   Questions:  Find out the value of the firm with the help of given information: Particulars Amount Earnings before interest and tax 3, 50, 000 Cost of equity 10% Cost of debt 7.2% Debenture 1,00,000 Find out the overall cost of capital with the help of net income approach. (Assume tax rate-10%) Solution: Particulars Amount Earnings before interest and tax 3, 50, 000 Less: Interest @7.2% 7, 200 Earnings before tax 3, 42, 800 Less: Tax@10% 34, 280 Net income 3, 08, 520 Cost of equity 10% Market value of equity (S =net income/ cost of equity) 30, 85, 200 Market value of debt (B) 1, 00, 000 Value of the firm (S+B) 31, 85, 200 Questions:  Find out the overall cost of capital if the equity capitalisation rate is 12...
1 comment
Read more