Horace Corporation has $200,000 of convertible 5% bonds. Each $500 bond is conve

Question

Horace Corporation has $200,000 of convertible 5% bonds. Each $500 bond is convertible into 50 shares of common stock. The bonds were sold at par and are currently trading at par, and the required return on nonconvertible bonds of similar risk is 11%. Common stock is trading at $ 23 per share. When calculating debt to equity ratio: Convertible bonds should be treated as debt Convertible bonds should be excluded from debt but not included in equity Convertible bonds should be treated as equity Half the convertible bonds should be treated as debt, and the other half as equity

Explanation / Answer

Convertible bonds should be treated as equity Half the convertible bonds should be treated as debt, and the other half as equity 200K*5% = 10K. So, EBIT + Int / Int = 145+10 / (45+10)

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