Evaluate the following statement: “Issuing convertible securities is a means by which a firm can sell common stock for more than the existing market price.”

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Evaluate the following statement: “Issuing convertible securities is a means by which a firm can sell common stock for more than the existing market price.”

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Evaluate the following statement: “Issuing convertible securities is a means by which a firm can sell common stock for more than the existing market price.”

Explanation & AnswerSolution by a verified expert

Explanation

When a convertible security is issued, the price at which it is being issued shows the price of the underlying common stock. Thus, when the convertibles are converted to the company's common equity, the conversion is done at the price at which they are  originally issued. After issuance of the convertible, the investor will want to convert the security into common equity, if the company and stock price has gone up  The price at which the investor would convert will be below the market price Thus, the investor will earn profit and this makes the mentioned statement incorrect.

Verified Answer

The statement is not correct because when the convertible securities are converted into the common stock, the price at which they are converted, is the price at which they were actually issued, this price is generally less than the current market price

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