Skip to content

CS Professional · Strategic Management and Corporate Finance · Sources of Corporate Funding

Sundaram Auto Ltd issues 10,000 convertible debentures of Rs 1,000 each. Each debenture is convertible into 20 equity shares. The current market price of the equity share is Rs 40. What is the conversion price per share and the conversion value of one debenture?

The conversion price is Rs 50, found by dividing the Rs 1,000 face value by 20 shares. The conversion value is Rs 800, being 20 shares multiplied by the market price of Rs 40. The market price is below the conversion price, so conversion is not yet attractive.

  1. AConversion price Rs 50; conversion value Rs 800Correct
  2. BConversion price Rs 50; conversion value Rs 1,000
  3. CConversion price Rs 40; conversion value Rs 800
  4. DConversion price Rs 20; conversion value Rs 800

Explanation

Conversion price = face value / shares per debenture = 1,000 / 20 = Rs 50. Conversion value = 20 x Rs 40 market price = Rs 800. Using Rs 40 as the conversion price confuses market price with conversion price, and Rs 20 is simply the share count.

Did you get it right without looking?

One question tells you little. A timed set on Sources of Corporate Funding shows your real accuracy, how long you take and where you lose marks.

Practise Sources of Corporate FundingFree diagnostic mock

More Sources of Corporate Funding questions