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Unformatted text preview: . Because the security is first sold with a conversion
price above the current market price of the firm’s stock, conversion is initially not
attractive. The issuer of a convertible could alternatively sell common stock, but
only at or below its current market price. By selling the convertible, the issuer in
effect makes a deferred sale of common stock. As the market price of the firm’s
common stock rises to a higher level, conversion may occur. Deferring the
issuance of new common stock until the market price of the stock has increased
means that fewer shares will have to be issued, thereby decreasing the dilution of
both ownership and earnings.
Another motive for convertible financing is its use as a “sweetener” for
financing. Because the purchaser of the convertible is given the opportunity to
become a common stockholder and share in the firm’s future success, convertibles can be normally sold with lower interest rates than nonconvertibles. Therefore, from the firm’s viewpoint, including a conversion feature reduces the
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- Fall '13