9. 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?
Answer: A
The per-share cost basis for the bondholder will be $25.
When a corporate bond is convertible into shares of common stock, the cost basis per share upon conversion is determined by dividing the bond's par value by the number of shares it can be converted into. In this case, the bond is purchased at par value, which is typically $1,000, and it can be converted into 40 shares, resulting in a per-share cost basis of $25 ($1,000 ÷ 40).
A) $25
This option is correct because it accurately reflects the calculation for the per-share cost basis. The bondholder's total investment of $1,000 divided by the 40 shares gives a cost basis of $25 per share upon conversion.
B) $40
Option B is incorrect as it suggests a per-share cost basis of $40. This value does not result from dividing the bond's par value by the number of shares, which leads to a misunderstanding of the conversion calculation.
C) $250
This option is also incorrect. A per-share cost basis of $250 would imply that the bondholder would have paid $10,000 for the bond, which does not align with the information given that the bond is purchased at par value.
D) $400
Option D is incorrect as well. A per-share cost basis of $400 suggests an even higher investment amount that does not correlate with the bond's par value of $1,000 divided by 40 shares.
Conclusion
The per-share cost basis of $25 is determined by dividing the bond's par value of $1,000 by the 40 shares it can be converted into. All other options fail to reflect the correct conversion calculation based on the bond's par value, making them invalid in this context.