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Chapter 16: Q5IFRS (page 895)

Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser.

Short Answer

Expert verified

(a) Issuer has the benefit of lower cash interest cost.

(b) Purchaser of the convertible debt are entitled to receive the face value of debt at maturity or the number of shares by way of conversion, which increases the wealth.

Step by step solution

01

Explanation on convertible bond

A convertible bond is a fixed-income corporate debt security that yields interest instalments, however, can be changed over into a predetermined number of common stock or equity shares.

02

The conversion feature of convertible debt has a value to the issuer:

  1. From the point of view of the issuer, the change element of convertible debt brings about a lower cash interest cost. Furthermore, the issuer in arranging its long-range financing might see the convertible debt for the purpose of raising equity capital over the long term.
03

The conversion feature of convertible debt has a value to the purchaser:

b) The purchaser obtains a choice to get either the face measure of the debt upon maturity or the predefined number of common shares upon conversion.

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Most popular questions from this chapter

CA16-3 WRITING (Stock Warrants—Various Types) For various reasons a corporation may issue warrants to purchase shares of its common stock at specified prices that, depending on the circumstances, may be less than, equal to, or greater than the current market price. For example, warrants may be issued:

1. To existing stockholders on a pro rata basis.

2. To certain key employees under an incentive stock-option plan.

3. To purchasers of the corporation’s bonds.

Instructions

For each of the three examples of how stock warrants are used:

(a) Explain why they are used.

(b) Discuss the significance of the price (or prices) at which the warrants are issued (or granted) in relation to (1) the current market price of the company’s stock, and (2) the length of time over which they can be exercised.

(c) Describe the information that should be disclosed in financial statements, or notes thereto, that are prepared when stock warrants are outstanding in the hands of the three groups listed above

What is meant by the term antidilution? Give an example.

What are the arguments for giving separate accounting recognition to the conversion feature of debentures?

Over what period of time should compensation cost be allocated?

CA16-5 (EPS: Preferred Dividends, Options, and Convertible Debt) “Earnings per share” (EPS) is the most featured, single financial statistic about modern corporations. Daily published quotations of stock prices have recently been expanded to include for many securities a “times earnings” figure that is based on EPS. Stock analysts often focus their discussions on the EPS of the corporations they study.

Instructions

(a) Explain how dividends or dividend requirements on any class of preferred stock that may be outstanding affect the computation of EPS.

(b) One of the technical procedures applicable in EPS computations is the “treasury-stock method.” Briefly describe the circumstances under which it might be appropriate to apply the treasury stock method.

(c) Convertible debentures are considered potentially dilutive common shares. Explain how convertible debentures are handled for purposes of EPS computations.
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