When a company has a convertible bond in its capital structure,

Question

Quizplus · Accepted Answer

When a company calls a convertible bond, it typically converts it into equity, which increases the firm's equity while decreasing its debt, thus reducing the debt-to-equity ratio. This can improve the firm's creditworthiness and potentially lower its cost of capital. Therefore, choice A is correct. Choice B is incorrect because the conversion of the bond can potentially dilute the firm's basic earnings per share. Choice C is also incorrect as there can be advantages for the firm if it forces the conversion of the bonds, such as reducing the interest expense on the debt.

When a Company Has a Convertible Bond in Its Capital