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1. What is the effect to the balance sheet of MNO company when their convertible bondholders...

1. What is the effect to the balance sheet of MNO company when their convertible bondholders choose to convert their bonds to common stock? Assume bondholders are required to turn in their bonds and pay S5 per share to receive common stock. Answered as a paragraph.

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Answer #1

If MNO's convertible bondholders choose to convert their bonds to common stock by paying $5 per share, the company's Stockholders' Equity and the Cash balance will go up whereas the company's debt will go down. This will lead to a drop in the EPS ratio as the number of equity shares go up, however, this will also improve the debt equity ratio which is good for the company. Depending on the number of bonds involved, it could also substantially support the company in terms of its cash flows and it will also improve the cash flow from financing activities. Another positive point in terms of cash flows is that the company will finally be free from its fixed interest payment obligations and at the same time they have also been saved of a huge outflow of cash had the bondholders chose the option to redeem the bonds instead of converting them.

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