Know About The Wonderful Features Of Convertible Bonds

Part – 7

In our last tutorial, we have understood capital structure of the firm. In this article we will understand convertible features

Short Term Borrowings – Short Term Debt of $5.2million

Revolver– Short Term Debt of $14.2 million as it matures within one year

Bonds– Long Term Debt of $68 million and Short Term Debt of $12million

Convertible Bond –

Classification of convertible bonds depends on the current market price. If the current market price (CMP) is less than the conversion price, then all the bonds should be treated as Long Term Debt. However, if the current market price (CMP) is greater than the conversion price, then all the bonds should get converted to common equity.

Here,  CMP = $21 per share

Conversion Price = $25

Since the CMP is less than the conversion price, $7 million should be treated as long term debt.

Convertible Preferred Stock –

Classification of convertible preferred stock depends on the current market price. If the current market price (CMP) is less than the conversion price, then all the convertible preferred stock should be treated as Preferred Equity. However, if the current market price (CMP) is greater than the conversion price, then all the convertible preferred stock should get converted to common equity.

CMP = $21 per share

Conversion Price = $20 per share.

CMP > Conversion Price, hence, the preferred stock should get converted to common equity.

$9 million should be treated as common equity.

0.50 million additional share issued due to conversion

What Next

In this article we have understood convertible bonds features. In our next article we will calculate ‘in the money’ stock options. Till then, Happy Learning!

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