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

Question

Quizplus · Accepted Answer

When a company has a convertible bond in its capital structure, it can reduce its debt-to-equity ratio by calling the bond. This is because when the bond is converted into equity, it no longer counts as debt on the company's balance sheet. There may also be a dilution of earnings per share if the bonds are converted, so there is some advantage to the firm in forcing conversion of the bonds. However, the statement "there is no effect on the firm's earnings per share" is not entirely accurate as there may be an impact if the bonds are converted. Therefore, options B and C are incorrect.

When a Company Has a Convertible Bond in Its Capital