Many Holders of Convertible Bonds Will Not Convert When the Firm's

question 86

Multiple Choice

Many holders of convertible bonds will not convert when the firm's common stock price exceeds the conversion price because ________.

• A) the common stock price may go up further and the firm cannot have any other mechanism to stop the bondholders from taking undue advantage of the conversion feature
• B) they already have the market price benefit and may still receive fixed periodic interest payments
• C) of the dilution of EPS
• D) interest payments are tax deductible and it will affect their earnings

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Definitions:

Tax-Exempt Status

A designation that exempts specific entities or income from tax under federal or state laws.

Personal Assets

Items of value owned by an individual, including both tangible and intangible assets, such as cash, property, investments, and intellectual property.

Insolvent

The condition of being unable to pay off owed debts as they become due.

Total Outstanding Stock

The total shares of a company's stock that are currently owned by all its shareholders, including shares held by institutional investors and restricted shares.