The conversion ratio is the number of common shares obtained when a conversion is made from preference shares or a convertible security.
The conversion ratio is the number of common shares obtained when a conversion is made from preference shares or a convertible security. In short, the higher the security, the higher the number of common shares exchanged. The conversion ratio is calculated when the preference shares or convertible security are issued and has an impact on the conversion price of the equity.
Thus, the conversion ratio is calculated by dividing the par value of the convertible security by the conversion price of equity. Here is the formula:
Conversion Ratio = Par Value of Convertible Bond/Conversion Price of Equity
For preference shares, the conversion ratio is generally set as 1:1 when issued. However, the ratio can also be determined by the price of the preferences shares over the price of common shares.
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