Calculating Conversion Price — Super Business Manager

The Conversion Price is a crucial term in the context of convertible securities, such as convertible bonds or convertible preferred stock. It is the price per share at which the convertible security can be exchanged for the issuer’s common stock.

It’s important to note that the Conversion Price is fixed at the time the convertible security is issued and does not change with the market price of the stock, though it is subject to adjustments for corporate actions like stock splits.

1. The Core Conversion Price Formula

The Conversion Price is fundamentally linked to the Conversion Ratio and the security’s Par Value (or principal amount).

The formula is:

$\text{Conversion Price} = \frac{\text{Par Value (or Principal Amount) of Convertible Security}}{\text{Conversion Ratio}}$

Par Value (or Principal Amount): This is the face value of the convertible security (e.g., typically USD1,000 for a convertible bond or the issue price for preferred shares).

Conversion Ratio: This is the specified number of common shares an investor receives for each unit of the convertible security they convert.

Example for a Convertible Bond

Let’s say a company issues a convertible bond with the following terms:

Par Value: USD1,000

Conversion Ratio: 25-to-1 (meaning one bond converts into 25 shares of common stock)

$\text{Conversion Price} = \frac{\$1,000}{25 \text{ shares}} = \mathbf{\$40 \text{ per share}}$

This means the bondholder is effectively buying the company’s common stock at USD40 per share when they convert the bond. The conversion is only considered profitable if the common stock’s market price rises above this USD40 Conversion Price.

2. Calculating the Conversion Ratio (If not provided)

If you are given the Conversion Price and need to find the Conversion Ratio, you can simply rearrange the formula:

$\text{Conversion Ratio} = \frac{\text{Par Value (or Principal Amount) of Convertible Security}}{\text{Conversion Price}}$

3. Real Business Example: Technology Company Convertible Bond

In 2019, the South Korean technology company Kakao Corporation issued convertible bonds to institutional investors.

Let’s assume a simplified scenario based on market practices:

Component	Value
Par Value of each bond	KRW 100,000,000
Initial Conversion Price	KRW 125,000 per common share

To find the initial Conversion Ratio for one bond:

$\text{Conversion Ratio} = \frac{\text{KRW } 100,000,000}{\text{KRW } 125,000 \text{ per share}} = \mathbf{800 \text{ shares per bond}}$

This means that an investor holding one of these bonds could exchange it for 800 shares of Kakao common stock, at a cost equivalent to KRW 125,000 per share.

4. Calculating Conversion Price for Convertible Notes (Startups)

For convertible notes (a common early-stage startup financing instrument), the Conversion Price is usually not a fixed number but is calculated at the next equity financing round (the “Qualified Financing”).

The note converts at the lower of two prices:

The Discount Price: The share price of the new financing round, discounted by the agreed-upon percentage (e.g., 20%).

$\text{Discount Price} = \text{New Round Price per Share} \times (1 - \text{Discount Percentage})$

The Cap Price: The price per share implied by the Valuation Cap (if included in the note), calculated using the formula:

$\text{Cap Price} = \frac{\text{Valuation Cap}}{\text{Fully Diluted Capitalization}}$

The investor’s Conversion Price will be the lower of the Discount Price and the Cap Price, which ensures they get the best deal.