ou are thinking about buying 

DoviaDovia 

​Co.'s convertible bonds. You plan to convert to equity at the end of the year and you think that 

DoviaDovia​'s 

common equity will be priced at 

​$3535 

per share at that point. What conversion ratio should 

DoviaDovia​'s 

bonds have in order for you to expect to be able to convert them at the end of the​ year?

Question content area bottom

Part 1

The conversion ratio should​ be:  ​(Select the best choice​ below.)

A.Conversion Ratio equals Cost of Conversion times 35

Conversion Ratio equals Cost of Conversion times 35Conversion Ratio=Cost of Conversion×35

B.Conversion Ratio equals StartFraction 35 Over Cost of Conversion EndFraction

Conversion Ratio equals StartFraction 35 Over Cost of Conversion EndFractionConversion Ratio=35Cost of Conversion 

C.Conversion Ratio equals StartFraction Cost of Conversion Over 35 EndFraction

Conversion Ratio equals StartFraction Cost of Conversion Over 35 EndFractionConversion Ratio=Cost of Conversion35

D.Conversion Ratio equals StartFraction Cost of Conversion minus 35 Over 35 EndFraction

Conversion Ratio equals StartFraction Cost of Conversion minus 35 Over 35 EndFraction

To calculate the **conversion ratio** for a convertible bond, we use the following formula:

\[
\text{Conversion Ratio} = \frac{\text{Par Value of the Bond}}{\text{Conversion Price per Share}}
\]

In this case, you are given that you expect DoviaDovia's equity to be priced at $35 per share at the end of the year.

Let's analyze the choices based on this concept:

- **A.** Conversion Ratio = Cost of Conversion × 35  
  This is incorrect, as multiplying the conversion price by 35 does not give the conversion ratio.

- **B.** Conversion Ratio = $\frac{35}{\text{Cost of Conversion}}$  
  This is incorrect because the conversion ratio should be the bond's face value divided by the conversion price, not the reverse.

- **C.** Conversion Ratio = $\frac{\text{Cost of Conversion}}{35}$  
  This option aligns with the formula for calculating the conversion ratio, where the par value (Cost of Conversion in this context) is divided by the expected stock price ($35).

- **D.** Conversion Ratio = $\frac{\text{Cost of Conversion} - 35}{35}$  
  This is incorrect because the conversion ratio does not involve subtracting the stock price from the bond's cost.

Thus, the correct choice is **C**. 

Would you like to go into more detail about this? 

Here are five related questions:
1. What is the significance of a higher conversion ratio in convertible bonds?
2. How is the par value of a bond determined in practice?
3. What happens if the stock price does not reach the expected price at the time of conversion?
4. How does the market price of the bond affect the conversion decision?
5. Can the conversion ratio of a bond change over time?

**Tip:** When investing in convertible bonds, always check if there are any restrictions or penalties related to conversion.

You are thinking about buying DoviaDovia Co.'s convertible bonds. You plan to convert to equity at the end of the year, and you think that DoviaDovia's common equity will be priced at $35 per share at that point. What conversion ratio should DoviaDovia's bonds have in order for you to expect to be able to convert them at the end of the year?

This problem helps you calculate the correct conversion ratio for DoviaDovia Co.'s convertible bonds, given an expected equity price of $35 per share. Learn how to apply the bond conversion formula to determine the ratio and make informed investment decisions.

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