At the last SDI board meeting, one of the directors suggested to Bob Wilkes that he consider financing with convertible bonds because convertibles carry lower coupon rates than
straight, nonconvertible debt. Since SDI needs to cut costs, issuing debt with a lower interest rate would be desirable. However, Bob knows that convertibles have a “true cost” which is
different from their coupon rate, so he said he would get back to the director. Now, he wants
you to consider convertibles in your study, explaining how to calculate their true cost and
how they should be handled in the WACC calculation.