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My question is about COSTCO's convertibles. I was familiar with "if converted method" to measure the potential dilutive effects of potential dilution from CFA curriculum. The explanation given in the lecture was quite different. In the video, it was explained that whenever the face value of the outstanding convertibles is larger than the market value of the equivalent number of shares if converted, the holder of the convertible will not convert and there is no need for adjustment with respect to share dilution. Isn't this commensurate to comparing apples to oranges? Normally, one would compare present values to present values and future values to future values. Face value of the convertibles is their future value. Their PV is far below their face value and also the value of the shares if converted. In White and et al. (2003) the comparison of share price and the conversion price is given as a decision rule for deciding for the dilutive effects of convertible bonds and using option pricing models is suggested as one of the ways to separate debt and equity values of the convertible bonds. So the decision for the holder of the convertible is whether to exchange or not the PV of the convertibles for the equivalent number of COSTCO common shares. If this value is less than the total value of the shares,the convertibles are likely to be converted. So to sum it up, why is the future value (i.e., face value) of convertibles compared to the market value of shares? Read More