A corporate bond is convertible into 40 shares of the company's common stock and is purchased at par value. If converted by the bondholder, what will be his per-share cost basis?
$25.
When a corporate bond is convertible into 40 shares of common stock and purchased at par value (typically $1,000), the per-share cost basis upon conversion can be calculated by dividing the total investment by the number of shares received. In this case, $1,000 divided by 40 shares results in a cost basis of $25 per share.
This choice is correct because the calculation for the per-share cost basis involves taking the par value of the bond ($1,000) and dividing it by the number of shares it converts into (40). Thus, $1,000 / 40 = $25 per share.
This option is incorrect as it miscalculates the per-share cost basis. If the par value is divided by a smaller number of shares, such as 25, it would lead to a basis of $40, but since the bond converts into 40 shares, the correct division leads to a lower per-share cost basis.
Selecting this choice suggests an incorrect understanding of the cost basis calculation. If the bond was purchased at $1,000 and divided by 4 shares instead of 40, it would yield $250, but this scenario does not apply as the bond converts into 40 shares.
This choice is incorrect because it implies an erroneous division of the bond’s par value by a significantly lower number of shares than allowed. Dividing the $1,000 by 2.5 shares would yield $400, but this is not applicable in this context where the bond converts into 40 shares.
The per-share cost basis for a convertible bond is determined by dividing the bond's par value by the number of shares it converts into. In this case, the calculation yields $25 per share, which correctly reflects the investment allocation across the shares received. The other choices represent misunderstandings of this calculation and do not accurately reflect the conversion structure.
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