To explain: The advantages of issuing convertible securities.
Introduction:
Convertible securities:
It is a kind of security which as per convenience can easily be converted into another security according to the discretion of the security holder.
Answer to Problem 1DQ
The benefits of issuing convertible securities to a company are:
a. The rate of interest for a convertible security is lower than that on a non-convertible one.
b. It is the only security that provides the small firm an access to the capital markets.
c. These securities let the firm to sell the stocks at a price higher than its issue price.
Explanation of Solution
The benefits of issuing convertible securities to a corporation are:
1. Fixed and limited income will be received by the convertible bondholders until the time of conversion.
2. Bondholders do not have the right to vote for the directors. In case the management of the organization is worried about losing control in voting or requires another means of financing than selling convertible bonds will be more beneficial than the usage of common stock for funding purposes.
3. Interest on the bond is considered as a deductible expense for any issuing company.
4. Companies as per their convenience can sell convertible bonds at a much lower rate than the standard bond. The reason behind this is that the corporation has the option to purchase stock.
5. The debt-to-asset ratio declines when a bond is converted into stock in case the bond is called at a price higher than its conversion price.
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Chapter 19 Solutions
FOUNDATIONS OF FINANCIAL MANAGEMENT COD
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