Final answer:
An induced conversion involves a company offering an additional incentive to convertible debenture holders to convert their debt into equity, helping the company to reduce interest costs and manage its debt. In the provided case, Helloid offers $80,000 to encourage debenture holders to convert into common stock.
Step-by-step explanation:
Induced Conversion of Convertible Debentures
An induced conversion occurs when a company offers an additional incentive to the holders of its convertible debentures to encourage them to convert their debentures into common stock. In the given example, Helloid has $1,000,000 in par value convertible debentures and wishes to reduce its interest expense. To achieve this, the company is offering an additional $80,000 to debenture holders as an incentive to convert their holdings into 100,000 shares of $1 par value common stock. This strategy can be beneficial to the company because once the debentures are converted, the company no longer has to make interest payments on the debt, thus lowering its annual interest costs.
Convertible debentures are a type of debt instrument that not only provides interest payments to holders but also gives them the option to convert the debenture into a predetermined number of shares of the company's common stock. This option adds value to the debenture and can be appealing to investors who wish to participate in the potential equity upside of the issuing company. When interest expenses are high or a company wishes to improve its leverage ratios, inducing conversion can be an efficient approach to manage its debt obligations.