complex capital structure

CFA Level I
#1

A complex capital structure contains options and callable bond has option embedded. So why can’t C be the answer? A complex capital structure would typically contain: A) convertible bonds. B) bank notes. C) callable bonds. D) variable rate notes. Your answer: C was incorrect. The correct answer was A) convertible bonds. A complex capital structure is one that contains securities that have the potential to dilute a firms earnings per share. For example, convertible bonds, convertible preferred stock, options, and warrants have the potential to dilute earnings per share upon conversion or exercise.

#2

Callable doesn’t equal convertible. If it was callable and convertible, then you’d have something, but without the convertability feature, callable doesn’t mean potentially dilutive. At least that is my $.02.

#3

Callable is not equal to convertible BUT Callable = option (at least partly) NOW, options, and warrants have the potential to dilute earnings per share upon conversion or exercise. BUT, Conversion happens at the will of other party, not yours! is this the reason why C is wrong?

#4

So if a bond is callable, it is usually callable at some premium to par like 101 or something. So I’m Company XYZ and I issue bonds that are callable and down the road I call them at the 101. Where is any kind of dilution or potential dilution to EPS? I’m not seeing it.

#5

dingo is right, puttable the person exercises the bond and buys shares at X so its adds to no of shares outstanding thus diluting the eps. callable had no dilution effects

#6

When a company calls a bond it pays in cash, when a bond is converted company issues new shares. Simple as that. No dillution in the former case, whatsoever. Milos

#7

Agree with Milos - simple as that. The options that are dilutive above are things like employee stock options. The call options embedded in bonds are just different animals altogether. If the caefteria is offering two lunch soup options, is the cafeteria dilutiive?

#8

I don’t know what they put in the soups, but they surely diluted some veggies :slight_smile: And Milos is correct.