Hilton Hotels Corp. has a convertible bond issue outstanding. Each bond, with a face value of $ 1,000, can be converted into common shares at a rate of 61.2983 shares of stock per $ 1,000 face value bond (the conversion rate), or $ 16.316 per share. Hilton’s common stock is trading (on the NYSE) at $ 15.90 per share and the bonds are trading at $ 975.
a. Calculate the conversion value of each bond.
b. Determine if it is currently profitable for bond holders to convert their bonds into shares of Hilton Hotels common stock.