Question 5.7: Outline the advantages and disadvantages to a company of iss...

Advantages:
– convertibles may be attractive to particular investors;
– interest rates on convertibles are usually lower than on straight bonds;
– interest charges on bonds are tax allowable;
– bonds increase gearing but might decrease the cost of capital;
– convertible bonds can be self-liquidating;
– conversion will not harm the capital structure and may even help it.
Disadvantages:
– there may be restrictive covenants attached to convertible bonds;
– issuing bonds decreases debt capacity;
– dilution of EPS may occur on conversion;
– conversion may cause dilution of control of existing shareholders.