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Home > Financing Best Practice > Understanding the True Cost of Issuing Convertible Debt and Other Equity-Linked Financing

Financing Best Practice

Understanding the True Cost of Issuing Convertible Debt and Other Equity-Linked Financing

by Roger Lister

Making It Happen

The decision to issue CSs follows the answers to a series of questions.

  • Is there presently a “hot convertible debt window” in the market or are there contraindications?

  • Do the causes of the window or the contraindications apply to us?

  • What is our debt capacity? If we are near its limits will CSs bust us or will they enable us to stretch our borrowing?

  • Can we tailor CSs to our real investment needs? Can we at the same time mitigate agency costs?

  • What tax-planning opportunities do CSs offer? Should we prioritize other tax benefits?

  • Measurement of the parameters of the cost of capital is notoriously difficult. How reliable are our estimates? For example, how stable is our beta and how reliable is our estimate of volatility?

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Further reading

Books:

  • Berk, Jonathan, and Peter DeMarzo. Corporate Finance. Boston, MA: Pearson Addison Wesley, 2007.
  • Bhattacharya, Mihir. “Convertible securities and their valuation.” In Frank J. Fabozzi (ed). The Handbook of Fixed Income Securities. New York: McGraw-Hill, 2005; 1393–1442.
  • Brealey, Richard A., Stewart C. Myers, and Franklin Allen. Principles of Corporate Finance. 9th ed. New York: McGraw-Hill, 2007.
  • Copeland, Thomas, Fred Weston, and Kuldeep Shastri. Financial Theory and Corporate Policy. 4th ed. Boston, MA: Addison-Wesley, 2004.
  • Tuckman, Bruce. Fixed Income Securities: Tools for Today’s Market. 2nd ed. Hoboken, NJ: Wiley, 2002.

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