Occasionally it is said that issuing convertible bonds is better than issuing stock when the firm's shares are undervalued. Suppose that the financial manager of BFC Company does have inside information indicating that the BFC's stock price is too low. BFC's future earnings will in fact be higher than investors expect. Suppose further that the inside information cannot be released without giving away a valuable competitive secret. Clearly, selling shares at the present low price would harm BFC's existing shareholders.

Will they also lose if convertible bonds are issued? If they do lose in this case, is the loss more or less than it would be if common stock were issued?