Amazon.com, Inc., gained renown as online marketplace for books, records, and other products. Although the increase in its stock price was initially meteoric, only recently has the company begun to earn a profit. To support its enormous growth, Amazon.com issued $500,000,000 in 6.845 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 issue was above the market price. The market value of Amazon.com’s common stock has been quite volatile, from $39 to $95 in 2007.

What reasons can you suggest for Amazon.com’s management choosing notes that are convertible notes or issuing common stock directly? 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?