If-Converted Method (Securities) - Explained
What is the If-Converted Method of valuing Convertible Securities?
Written by Jason Gordon
Updated at July 9th, 2021
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
-
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
- Courses
Table of Contents
What is the If-Converted Method of Valuing Securities? How does the If-Converted Method of Valuing Securities Work? Recent Example of the If-Converted MethodAcademic Research on the If-Converted MethodWhat is the If-Converted Method of Valuing Securities?
A security that can be changed to another security is a convertible security, preferred stocks and bonds are the most common examples of convertible securities. The If-Converted Method is used in estimating the value of new shares that convertible securities are changed into. This means the changes in the amount of outstanding shares when a convertible security is changed to shares are calculated using the if-converted method. In most cases, if the conversion of convertible securities is done when the stock price is more than the exercise price, the if-converted method becomes more essential.
Back To: BUSINESS TRANSACTIONS, ANTITRUST, & SECURITIES LAW
How does the If-Converted Method of Valuing Securities Work?
Preferred shares or bonds have one intrinsic nature and this is their ability to be converted into new shares, which is why they are the common forms of convertible securities. Convertible securities are more appealing to investors than many other forms of securities, this is owing to the fact that the direction of the market grants more flexibility and profit to investors. Bond issuers often offer convertible securities with the agreement that the number of shares that an investor is entitled to during the conversion would be determined by the securitys conversion ratio. The bond issuer can determine the conversion rate, this can be fixed or can change depending on the direction of the market.
Recent Example of the If-Converted Method
The if-converted method has been used over time by investors who want to calculate the value of convertible securities they invest in as at the time they are converted into new shares in the market. There are many instances where the if-converted method has been used. The most recent one was in 2018 when the method was used by Stericycle to measure the dilution of convertible securities. Through this method, Stericycle was able to account for the value of change in outstanding shares when its convertible securities were changed to new shares. The if-converted method is also important for companies that have invested in convertible securities, especially when compiling financial statements.
Academic Research on the If-Converted Method
Panel content