16-1 Convertible Debt 1

16-1 Convertible Debt 1 - Ahead of the Tape: Watered Down...

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Ahead of the Tape: Watered Down Source: Wall Street Journal, 12 April 2004 Over the past several years, companies couldn't resist the siren song of cheap convertible-bond financing. Now investors are finding out just how expensive that financing was. Yahoo's earnings last week blew away investors, but few noticed a surge in its shares outstanding. The share count rose to 713.3 million, up markedly from the 615.8 million a year earlier. Part of that was because of acquisitions, but a nice chunk was due to a convertible-debt financing from about a year ago. Yahoo issued $750 million in convertible notes. These are bonds with an interest rate lower than in a normal debt financing because they come with a call option. If the stock rises to a certain price, the bond- holder can convert into stock. If the stock rises gradually, preventing conversion for several years, investors have little concern. But sometimes a com- pany's share price can rise rapidly, making dilution an issue. Yahoo's shares outstanding went up by about 31 mil-
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This note was uploaded on 05/03/2010 for the course ACCT 202 taught by Professor Yang during the Spring '10 term at UPenn.

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