How does a forced conversion improve the companyes debt/equityratio? - ProProfs Discuss
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How does a forced conversion improve the companyes debt/equityratio?

Asked by Danish, Last updated: Sep 04, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

How does a forced conversion improve the debt/equity ratio? investors who decide toconvert their securities from debt to equity means that the money that was raised bythe issuer in the form of debt is converted to equity. in other words, theres no longerany principal amount to be paid back, and theres no longer any required interestpayments to be made. the money is now equity and eliminates any risk that comeswith having debt on the balance sheet.since the debt/equity ratio is calculated by dividing debt by equity, and debt is reducedwhile equity is increased in a forced conversion, the ratio value improves.yes, any call or conversion of debt helps to improve the debt/equity ratio. the forcedconversion is the best method for the issuer because of the scale of the conversionand need for fewer funds on the issuers part to improve the debt/equity ratio.what is the advantage for the debt holder? a forced conversion generally only occurswhen there is an improvement in the value of the underlying common shares, so thedebt holder, by converting securities, gets to participate in the capital growth of thecompany.
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