- September 11, 2021
- Posted by: Nicholas Fitch
Equity can be considered as a call option to the company. Creditors may be considered owners of the business and have sold an appeal option with an exercise price equal to the amount of debt required. A possible way to insure against the loss of a total portfolio of shares (combinations of holding shares and put options): portfolio insurance is a protection put written on a portfolio and not on a single share. Converting bonds into stocks is another way to retire bonds. Convertible bonds are corporate bonds with a provision that allows the bondholder to convert each loan into a fixed number of common shares. The conversion ratio is the number of shares received when converting a convertible bond, usually expressed by a par value of $1000 USD. The conversion price is the face value of a convertible bond divided by the number of shares received when the loan was converted. For example, imagine a convertible loan with a face value of $1,000 and a conversion ratio of $20. If you decide to convert the loan on the maturity date, you will receive 20 shares. If you decide not to convert, you will receive $1000.
By converting, you will “pay” $1000 for 20 shares. This implies a share price of $US 50 per share. An entity may also opt for the issuance of convertible bonds that can be consulted. One possible way to insure against a loss: A protective put is the purchase of a put option on a stock you already own. The current share price determines the probability of turning a convertible loan into equity. Conversion is likely if the share price is high and the price of the convertible loan is close to the price of the convertible share. It is unlikely that the share price will be low and that the value of the convertible loan will be close to that of a pure loan. A share of shares may be considered as a call option on the assets of the entity whose exercise price is equal to the value of the outstanding debt. Financial managers need information on how investors value the company`s searchable obligations. The capital structure of an enterprise is determined by the relative shares of debt, equity and other securities that an enterprise does not have to hold. Most companies choose to finance only with equity or a combination of equity and equity.
Different financing options promise each security holder different future amounts in exchange for the money raised today. A company must also consider whether the securities it publishes are fairly priced on the market, have tax consequences, incur transaction costs or alter its future investment opportunities. Decisions about accumulating cash, paying down debt, or paying dividends or buying back shares also affect the capital structure. . . .