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Hybrid Financing: Preferred Stock, Warrants, and Convertibles: Convertibles Convertible securities are bonds or preferred stock that, under specified terms and conditions, can be exchanged for
Hybrid Financing: Preferred Stock, Warrants, and Convertibles: Convertibles
Convertible securities are bonds or preferred stock that, under specified terms and conditions, can be exchanged for common stock at the option of the holder. Conversion of these securities does not provide new capital; debt or preferred stock is simply replaced on the balance sheet by common stock. However, reducing the debt or preferred stock will improve the firm's financial position and make it easier to raise additional capital, but raising additional capital requires a separate action.
The conversion ratio CR is the number of shares of common stock that are obtained by converting a convertible bond or share of convertible preferred stock. The conversion price is the effective price paid for common stock obtained by converting a convertible security.
From the standpoint of the issuer, which of the following statements is a disadvantage of convertibles?
Because convertibles have low coupon rates, they require the firm to sell common stock at discount prices relative to prices that are currently prevailing.
Convertibles typically have a low coupon interest rate, and the advantage of this lowcost debt will be lost when conversion occurs.
If the company truly wants to raise equity capital and if the stock price does not rise sufficiently after the bond is issued, then the company will be stuck with debt rather than the desired equity.
I isare correct.
Quantitative Problem : Hartley Enterprises recently issued convertible bonds with a $ par value. The bonds have a conversion price of $ per share. What is the bonds' conversion ratio, CR Round your answer to the nearest whole number.
Quantitative Problem : Edwards Inc. recently issued convertible bonds with a $ par value. The bonds have a conversion ratio CR of What is the bonds' conversion price Do not round intermediate calculations. Round your answer to the nearest cent.
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