In Its 2018 Annual Report to Shareholders, Health Foods, Inc

question 206

Essay

In its 2018 annual report to shareholders, Health Foods, Inc., disclosed the following information about some of its indebtedness:

In addition, the company disclosed the following:

We have outstanding zero coupon convertible subordinated debentures which had a book amount of approximately $158.8 million and $151.4 million at September 26, 2018, and September 28, 2017, respectively. The debentures have an effective yield to maturity of 5 percent and a principal amount at maturity on March 2, 2032, of approximately $308.8 million. The debentures are convertible at the option of the holder, at any time on or prior to maturity, unless previously redeemed or otherwise purchased. The debentures have a conversion rate of 10.64 shares per $1,000 principal amount at maturity, representing 3,285,632 shares. The debentures may be redeemed at the option of the holder on March 2, 2022, or March 2, 2027, at the issue price plus accrued original discount totaling approximately $188 million and $241 million, respectively.


The fair value of convertible subordinated debentures is estimated using quoted market prices. Book amounts and estimated fair values of our financial instruments other than those for which book amounts approximate fair values as noted above are as follows (in thousands)

-Required: Suppose that half of the bondholders had converted them into Health Foods' stock at the end of the 2018 fiscal year when the stock price is $90 per share. What gain or loss from this conversion would Health Foods have recorded on the transaction using the book value method? The market value method?

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Definitions:

Antennae

(sing., antenna) Sensory structures characteristic of some arthropod groups.

Segmentation Genes

Genes that determine the number and polarity of body segments in an embryo, playing a crucial role in the early development of many animals.

Body Organization

The hierarchical arrangement of biological structures from the simplest to the most complex, defining the anatomy and physiology of living organisms.

Homeotic Genes

Genes that control the development of anatomical structures in organisms, determining the placement and spatial organization of body parts.