why would milacron use a ldquo hybrid rdquo instrument like convertible bonds instea 600826

The accounting for convertible bonds

Milacron Inc. is a leading supplier of plastics-processing technologies and industrial fluids. Headquartered in Cincinnati, Ohio, the company employs 3500 people and operates major manufacturing facilities in North America, Europe, and Asia. Milacron’s financial performance has been poor in recent years, including net losses of $191.1 million in 2003 (on sales of $740 million).

In March 2004, Milacron announced the issuance of bonds to Glencore Finance AG and Mizuho International. The proceeds were used to repay outstanding notes that were about to come due. Glencore and Mizuho purchased $100 million of debt in total, $30 million of which would be convertible into Milacron common stock (par value = $1) at the option of the holders.

Required

1. Why would Milacron use a “hybrid” instrument like convertible bonds, instead of issuing debt and equity securities separately?

2. Milacron raised $30 million from the issuance of the convertible bonds. Assume that a similar straight bond (a nonconvertible bond with the same coupon payments and maturity value) would have raised $26 million. Prepare the journal entry to record the issuance of the convertible bonds in accordance with IFRS.

3. Assume that early in 2005, Glencore and Mizuho exercised their option and converted the bonds into 9 million shares of Milacron common stock. The stock price on the date of the conversion was $3.75, and the net book value of bonds payable was $24 million. Prepare the journal entry to record the conversion of Milacron bonds into common stock, assuming that no gain or loss is recognized on the transaction.