A firm has $5 million in debt , $1 million of which is convertible to shares of common stock, and $10 million in equity. If all the firm's convertible bondholders convert, what will happen
To the debt-equity ratio of the firm?

Question

Quizplus · Accepted Answer

Initially, the debt-equity ratio is $5 million / $10 million = 0.5 or 50%. If $1 million of debt is converted into equity, the new debt is $4 million, and the new equity is $11 million. The new debt-equity ratio is $4 million / $11 million ≈ 0.364 or 36.4%.

A Firm Has $5 Million in Debt , $1 Million