This preview shows page 1. Sign up to view the full content.
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...
View Full Document
This document was uploaded on 01/19/2014.
- Fall '13