Series 79 practice questionmediumConvertible Debt
Which of the following best describes the impact of convertible debt on a company’s capital structure?
- AIt has no effect on the dilution of existing shareholders.
- BIt permanently increases the company’s debt load.
- CIt is initially treated as debt but can increase equity if converted.✓ Correct answer
- DConvertible debt is classified as equity at issuance.
Explanation
Why C — It is initially treated as debt but can increase equity if converted.
Convertible debt is debt until conversion, when it becomes equity, thereby increasing shares outstanding. At issuance, it is not treated as equity and can cause dilution upon conversion.
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