Question

Hello, can you please help me understand question “g”. I am not sure how Rite Aid’s balance sheet would be affected if the notes were to convert, and why do firms issue these types of notes, and why are investors interested in buying them?

8. Consider the 4.75% Convertible notes. How would Rite Aid's balance sheet be affected if these notes were converted? Why do firms issue convertible notes? Why do investors buy such notes? h Daf - 10. Indebtedness and Credit Agreements Following is a summary of indebtedness and lease financing obligations at February 28, 2004 and March 1, 2003: February 28, 2004 March 1, 2003 $1,150,000 1,372,500 Secured Debt: Senior secured credit facility due April 2008..... Senior secured credit facility due March 2005 .. 12.5% senior secured notes due September 2006 ($142,025 and $152,025 face value less unamortized discount of $4,158 and 6,143)...... 8.125% senior secured notes due May 2010 ($360,000 face value less unamortized discount of $4,168) 9.5% senior secured notes due February 2011 .... Other......... 137,867 145,882 355,832 300,000 5,125 1,948,824 183,169 300,000 6,540 1,824,922 Lease Financing Obligations ..... 176,186 198,000 38,047 58,125 198,000 75,895 Unsecured Debt: 6.0% dealer remarketable securities due October 2003 ... 7.625% senior notes due April 2005..... 6.0% fixed-rate senior notes due December 2005 4.75% convertible notes due December 2006 ($250,000 face value less unamortized discount of $4,000 and $5,500) ........ 7.125% notes due January 2007 .... 11.25% senior notes due July 2008.... 6.125% fixed-rate senior notes due December 2008 9.25% senior notes due June 2013 ($150,000 face value less unamortized discount of $2,221)......... 6.875% senior debentures due August 2013........ 7.7% notes due February 2027 .. 6.875% fixed-rate senior notes due December 2028 246,000 210.074 150,000 150,000 244,500 335,000 150,000 150,000 147,779 184,773 295,000 140,000 1,759,673 200,000 300,000 150,000 1,861,520 3,862,628 3,891,666 Total debt ......... Short-term debt and current maturities of convertible notes, long- term debt and lease financing obligations... (23,976) (103,715) Long-term debt and lease financing obligations, less current maturities ..... $3,867,690 $3,758,913

Answer 1

It By Considering 4.75t. Convertible pores conversion Rite Aids Balance Sheet affected as follows. U1 dhe Bonds are converted They will become equity shahre Holderd. Percentage of voting Right of each io tolal voting Risblad be decreased and Earning Per Share will be decreased. InCase of Bonds we will not pay Income tax on Interest we will claim as exrenditure .But dividend Can't claim as expeo ditur AA Corporation issue a convertible bond to take advantage of reduced. Hinterest Rates, since the Presence of the conversion option Provides upside Potential for the bood Holde,s, and these Bonds tend to demand lower interest Rates compared to standard nominal Bond. I why do investors Prefer Investors Prefer Convertible notes because firstly They are elisible for Interest and Principle and If Company will go into good position. The Principle and Interest will be converted into equity shaves. They will become owners.