Bond
Convertible Bonds-> to assets -> share outstanding will go up-> pay less interest?
• Sell bonds at higher price
• Enable smaller firms or debt-heavy firms to obtain access to the bond market
o Cash (PV)
▪ Convertible bonds payable (value of debt only)
▪ Equity-conversion option
Calculation of EPS
• Basic EPS =NI/ shares of outstanding
• Diluted EPS=NI/ (shares of outstanding+diluted shares)
Why company want to exercise the Call/redeem option?
I/Y is going down and want to get out of the contract. Treasury will also be going down so that
future unpaid cash flow discounted at the decreased rate will be less than 500 million
dollars/Face value. Therefore, the buyer will always get their money back at 500 million. Protect
investor, and if don’t have protection won’t get the cash/investment from the potential buyer of
bond
If exercise the call option:
Loss on early distinguishment of debt
4M
Debt
500M
Cash
500M
Debt issuance cost
4M
Interest expense
Debt issuance cost
Cash
495M
Discount on B/P
5M
Bond Payable/Face amount
500M
