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.
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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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