You own 10 Bitterroot Industries Inc. 8 percent convertible debentures maturing

Question

You own 10 Bitterroot Industries Inc. 8 percent convertible debentures maturing in 2030. The conversion ratio of the debentures is 30, and the debentures are callable at $1,070 each. You bought the debentures when they were originally issued in 2000 for $1,000 each. At that time, Bitterroot common stock was selling at $28.50 a share, and now it is up to $44 a share. The convertible debentures are now selling at $1,320 each. Last week, you received a notice from Bitterroot Industries stating that the company is calling the debentures. a. What are your alternatives? b. Which alternative should you choose?

Explanation / Answer

You have 3 options
1. Convert debentures to equity, you will get equity stake in the compnay
2. Allow company to call debentures, you will get settlement amount
3. Sell debentures in the market, you will get settlement amount

1. Convert debentures to equity
Conversion ratio is 30, i.e. you will get 30 shares for each debenture.
Equity shares = 30 * 10 = 300 shares
Value of equity = 300 * 44 = 13,200

2. Allow company to call debentures
Each debenture is called at 1,070each.
So the value of settlement = 10 * 1070 = 10,700

3. Sell debentures in the market
Each debenture is sold at 1,320.
So the value of settlement = 10 * 1320 = 13,200

Since both option 1 and 3 have same value in the end, you can either sell the debentures in the market or convert them to get quity in the company

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