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On August 31, 2013, Chickasaw Industries issued $25 million of its 30-year, 6% convertible bonds dated August 31, priced to yield 5%. The bonds are convertible at the option of the investors into 1,500,000 shares of Chickasaw's common stock. Chickasaw records interest expense at the effective rate. On Aug 31, 2016, investors in Chickasaw's convertible bonds tendered 20% of the bonds for conversion into common stock that had a market value of $20 per share on the date of conversion. On Jan 1, 2015, Chickasaw Ind. issued $40 million of its 20-year, 7% bonds dated Jan 1 at a price to yield 8%. On Dec 31, 2016, the bonds were extinguished early through acquisition in the open market by Chickasaw for $40.5 million.
(a) What are convertible bonds and why would Chickasaw have issued them? (b) Suggest an alternative to the method Chickasaw used to calculate and record interest. (c) Answer question 2 (of the case problem).
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