What does a debt-equity swap typically involve for a publicly-traded company?

What does a debt-equity swap typically involve for a publicly-traded company?

• A. Exchange of cash for bonds
• B. Exchange of bonds for stocks
• C. Exchange of securities for real estate
• D. Exchange of stock for cash

Answer: (B)

A debt-equity swap typically involves a company exchanging its outstanding debt, such as bonds or loans, for equity in the form of stock. This process allows the company to reduce its debt load, improve its balance sheet, and potentially stabilize its financial situation by converting creditors into shareholders. By offering shares to creditors, the company can relieve itself of the obligation to repay the debt, which is particularly useful during financial distress or restructuring. This mechanism not only helps in reducing liabilities but also aligns the interests of creditors with the company's performance; creditors become invested in the company's success through their equity stake. Overall, this option is a strategic move for companies looking to enhance their financial flexibility while addressing debt issues.

A debt-equity swap typically involves a company exchanging its outstanding debt, such as bonds or loans, for equity in the form of stock. This process allows the company to reduce its debt load, improve its balance sheet, and potentially stabilize its financial situation by converting creditors into shareholders. By offering shares to creditors, the company can relieve itself of the obligation to repay the debt, which is particularly useful during financial distress or restructuring.

This mechanism not only helps in reducing liabilities but also aligns the interests of creditors with the company's performance; creditors become invested in the company's success through their equity stake. Overall, this option is a strategic move for companies looking to enhance their financial flexibility while addressing debt issues.