The presence of convertibles and other contingent

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Unformatted text preview: ce of the common stock into which it can be converted. The presence of convertibles and other contingent securities (warrants and stock options) often requires the firm to report both basic and diluted earnings per share (EPS). Convertibles are used to obtain deferred common stock financing, to “sweeten” bond issues, to minimize restrictive covenants, and to raise cheap funds temporarily. The call feature is sometimes used to encourage or “force” conversion; occasionally, an overhanging issue results. Demonstrate the procedures for determining the straight bond value, the conversion (or stock) value, and the market value of a convertible bond. The straight bond value of a convertible is the price at which it would sell in the market without the conversion feature. It typically represents the minimum value at which a convertible bond trades. The conversion (or stock) value of the convertible is found by multiplying the conversion ratio by the current market price of the underlying common stock. The market value of a convertible generally exceeds both its s...
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This document was uploaded on 01/19/2014.

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