Assume that for the next two weeks,the bondholders of Western Markets have the option of exchanging their bonds for common shares of the firm's stock.As a result of these exchanges,you should expect the firm's debt-equity ratio to:
A)decline and the stock's price to also decline.
B)decline and the stock's price to remain constant.
C)decline and the stock's price to increase.
D)increase and the stock's price to increase.
E)increase and the stock's price to remain constant.

Question

Quizplus · Accepted Answer

The bondholders exchanging their bonds for common shares will decrease the firm's debt and increase the number of outstanding shares of common stock. This will result in a decline in the debt-equity ratio. However, the increase in the number of common shares outstanding may dilute the value of existing common shares, leading to a decline in the stock's price. Therefore, both the debt-equity ratio and the stock's price are likely to decline.

Assume That for the Next Two Weeks,the Bondholders of Western