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    Convertible Debts

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    Question: A lot of small dot.com companies got financing in the form of convertible debt. I know this is like ordinary debt, but it pays a regular interest and the debtholders have the right to convert it to equity. Why would companies chose this instrument?

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    This is an issue of capital structure. A firm's optimal capital structure is that mixture of debt and equity than minimizes its weighted average cost of capital (WACC). Since the after-tax cost of debt is lower than equity for many corporations, why not use debt only or mostly? It turns out that, while debt reduces a company's tax liability because interest payments are deductible expenses, increasing amounts of debt raise both ...

    Solution Summary

    Question: A lot of small dot.com companies got financing in the form of convertible debt. I know this is like ordinary debt, but it pays a regular interest and the debtholders have the right to convert it to equity. Why would companies chose this instrument?

    $2.19

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