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 diluted 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 and convert it into equity. By doing so, the company can reduce its debt-to-equity ratio and improve its financial standing. This means that Option A is correct. Option B is incorrect because the conversion of the bond will have an impact on the company's diluted earnings per share. Option C is also incorrect because there can be advantages to the firm in forcing conversion of the bonds, such as reducing interest payments or improving investor perception of the company's financial strength.

When a Company Has a Convertible Bond in Its Capital