conversion ratio

Conversion ratio refers to the number of common shares obtained when a conversion is made from preference shares or a convertible security. It can be calculated when the preference shares or convertible securities are issued and has an impact on the conversion price of the equity. The higher the security, the higher the number of common shares exchanged.

When determining the conversion ratio, investors divide the par value of the convertible security by the conversion price of equity. This calculation provides clarity on the quantity of common shares an investor will acquire upon converting their preferred shares or convertible securities into common stock.

The formula for calculating the conversion ratio is straightforward:

CONVERSION RATIO = PAR VALUE OF CONVERTIBLE SECURITY / CONVERSION PRICE OF EQUITY

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