A company is considering the issue of a convertible bond compared to a straight bond issue (non-convertible bond).
Director A is concerned that issuing a convertible bond will upset the shareholders for the following reasons:
• it will dilute their control
• the interest payments will be higher therefore reducing liquidity
• it will increase the gearing ratio therefore increasing financial risk
Director B disagrees, and is preparing a board paper to promote the issue of the convertible bond rather than a non-convertible.
Advise the Director B which THREE of the following statements should be included in his board paper to promote the issue of the convertible bond?
A . The convertible bond may not dilute control as the bond holder has an option to choose conversion.
B . The coupon rate on the convertible bond will be lower than that on a non-convertible bond.
C . When converted into shares, the company will receive a cash inflow which can be used for future investments.
D . Issuing a convertible bond will have a more favourable impact on the gearing ratio than a non-convertible bond.
E . Over the life of the bond, a convertible will be more expensive than a non-convertible.
Answer: A,B,D