When a company has a convertible bond in its capital structure,
A) it can reduce its debt-to-equity ratio by calling the bond.
B) there is no effect on the firm's earnings per share.
C) there is no advantage to the firm in forcing conversion of the bonds.
D) all of these options are correct.

Question

Quizplus · Accepted Answer

When a company has a convertible bond in its capital structure, it has the option to call the bond, which means it can be redeemed before its maturity date. By doing this, the company can reduce its debt-to-equity ratio, which is the ratio of the company's total debt to its equity. This means that the company will have less debt and more equity, which is a positive change that can improve the company's financial position. Option B is incorrect because there can be an effect on the firm's earnings per share depending on whether the conversion of the bonds leads to an increase or decrease in the number of shares outstanding. Option C is also incorrect because there can be advantages to the firm in forcing conversion of the bonds, such as reducing the interest expense of the company.

When a Company Has a Convertible Bond in Its Capital