Just like any financing security, convertibles have certain advantages and disadvantages.

Based on your understanding of using convertibles for financing, identify whether each of the features listed in the following table is an advantage or a

disadvantage from an issuer's standpoint:

Feature

Convertibles allow investors to buy the company's shares at a certain strike price. Conversion usually takes place

when the company's share price increases beyond the conversion price.

If a company needs capital and wants to issue new stock but the current stock price is undervalued, the

company can use convertibles to sell stock at a predetermined price.

If a company issues convertible securities because it wants equity capital and the stock price does not eventually

increase, investors will not exercise the convertible, and the company will be left with debt.

Considering the pros and cons of convertible securities$,$ under which of the following two situations is a company likely to issue convertibles?

When the issuing company needs to raise equity financing but feels the market price of its stock is selling under the fair value of the stock

When the issuing company needs to raise equity financing but feels the market price of its stock is selling above the fair value of the

stock