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.

Question

Quizplus · Accepted Answer

When a company calls a convertible bond, it reduces the total amount of debt in its capital structure, which in turn reduces the debt-to-equity ratio. Therefore, choice A is correct. Choice B is incorrect because the conversion of the bond into equity will increase the number of shares outstanding, which will dilute earnings per share. Choice C is incorrect because there may be advantages to the firm in forcing conversion, such as reducing debt levels and increasing stock liquidity.

When a Company Has a Convertible Bond in Its Capital