Identify whether each of the features listed in the following table is an advant

Question

Identify whether each of the features listed in the following table is an advantage or disadvantage from an issuer's standpoint:

2. Considering the pros and cons of convertible securities, under which of the following two situations is a company likely to issue convertibles?

a. When issuing new stock could have a positive signaling effect on investors
b. When issuing new stock could have a negative signaling effect on investors

Feature Advantage Disadvatage If a company issues convertible securities because it wants equality capital and the stockprice does not eventually increase, investors will not exercise the convertible, and the company will be left with debt. Convertibles help companies sell bonds at low interest rates If a company needs capital and wants to issue new stock but the current stock price is undervalued, the company can use convertibles to sell stock at a predetermined price

Explanation / Answer

1.

Cost of equity is always higher than cost of debt , so return on equity is higher, but on default equity holders get last preference and debt holders have first preference.

For the 3 statements beliw are advantage/ disadvantsge in order.

A.Disvantage.

B.Advantage

C.Advantage

2.b.when issuing new stock will have negative signalling effect on investors.

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