The conversion option had been studied by Metrolinx (Finch - Sheppard Corridor study) and their cost estimate was $670 million; that's more than 50% extra to the whole cost of Sheppard LRT. Looks like too pricey for the chance to eliminate one transfer.
The combined Finch W - Sheppard E line would be too slow for a useful crosstown trunk; 38 km at 23 kph will take more than 1.5 hours on the LRT alone, not counting any time spent on connecting buses.
Sheppard LRT is (actually, would be) somewhat useful, but only as a feeder line. A usable crosstown line has to be faster.