Financial planning

Occasionally it is said that issuing convertible bonds is better than issuing stock when the firm’s shares are undervalued. Suppose that the financial man- ager of the Butternut Furniture Company does have inside information indicating that the Butternut stock price is too low. Butternut’s future earnings will in fact be higher than investors expect. Suppose further that the inside information cannot be released without giving away a valuable competitive secret. Clearly, selling shares at the present low price would harm Butternut’s existing shareholders. Will they also lose if convertible bonds are issued? If they do lose in this case, is the loss more or less than it would be if common stock were issued?

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