Many U.S. firms have completed exchanges or swaps of stock for debt. Collectively, such swaps often retire

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Many U.S. firms have completed exchanges or swaps of stock for debt. Collectively, such swaps often retire more debt than the value of the stock that is exchanged. In other words, the face value of the debt often exceeds the market value of the stock that is exchanged. Typical swaps might include:

• Convertible preferred stock for common stock

• Debt for convertible preferred stock

• Convertible debt for common stock

• Debt for cash and common stock Required

a. What do you suppose are the incentives or motivations for such swaps? Why would an investor or owner give up something with a historical cost higher than its current market value?

b. What is the effect of such swaps on a firm’s balance sheet?

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