Amazon.com, Inc., is well known today as an online marketplace for books, music, and other products. Although the increase in its stock price was initially meteoric, it was some years before the company began to earn a profit. To support its enormous growth, Amazon.com issued $500,000,000 in 6.875 percent convertible notes due in 2010 at face value. Interest is payable on February 1 and August 1. The notes are convertible into common stock at a price of $112 per share, which at the time of the issue was above the market price. The market value of Amazon.com’s common stock has been quite volatile, ranging from $48 to $146 in 2009.19
What reasons can you suggest for Amazon.com’s management choosing notes that are convertible into common stock rather than simply issuing nonconvertible notes or issuing common stock directly? Are there any disadvantages to this approach? Based on the fact that the price of the company’s common stock is over $100 per share, what would be the total theoretical value of the notes? If the holders of the notes were to elect to convert the notes into common stock, what would be the effect on the company’s debt to equity ratio, and what would be the effect on the percentage ownership of the company by other stockholders?