In many cases, convertible securities are employed as “deferred” common stock financing.
In many cases, convertible securities are employed as “deferred” common stock financing.
Does not immediately dilute earnings.
Securities are converted at a higher price than if they would have been directly issued. This has the impact of reducing the dilution effect.
The interest or dividend rate is likely to be less than that of straight debt or preferred stock. The greater the growth prospects of the firm’s common stock, the lower the stated rate the firm will need to pay.
Use of Convertible Securities
Investors can exercise their option to convert to common stock at any time.
Investors can exercise their option to convert to common stock at any time.
Companies can force conversion by calling the issue.
The company has an incentive to call only when the conversion price exceeds the call price by around 15% and when the common dividend rate is less than the interest or preferred. dividend rate investors are earning.
Firms attempt to stimulate conversion by including the “step-up” feature to the conversion price or increasing the common dividend.
