CH15 Intermed Acct. LO1 + LO2
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15 Terms
What are dilutive securities?
any financial instruments that have potential to increase number of common shares outstanding
What is convertible debt?
bonds that have feature of being able to convert into common stock during specified period
Why do companies issue convertible debt?
to lower interest cost
to manage capital structure
Why would an investor be interested in convertible debt?
equity gain
principal and interest protection
Value of convertible bond =
Value of debt component + value of equity component
What is a sweetener?
Additional consideration to induce conversion (recorded as an expense)
What is convertible preferred stock?
includes an option for the holder to convert preferred shares into a fixed number of common shares (part of SHE)
What is a stock warrant?
a security that gives investors the option to purchase a companys stock at a specific price over specific period
What are advantages of including warrants with bond issue?
provide opportunity to share future growth of company/sell warrants with bond issue
reduce cost of financing and to encourage investors to purchase their stock at some time over life of warrants
What are detachable stock warrants?
Warrants are sold separately from bonds
What are nondetachable stock warrants
Warrants are not sold separately from bonds
Synthetic convertible debt =
Debt + nondetachable stock warrants
Do nondetachable warrants require allocation?
No, only detachable warrants
What is a stock right?
preemptive privilege that saves existing stockholders from suffering dilution of voting rights w/o consent, no entry required
What does the certificate that represents stock right includes?
# of shares the holder of right can purchase
price where new shares may be purchased