Find out convertible bonds with a face value

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(a) ABC Ltd is a company that has been incorporated 3 years ago. The company's current share price is $1.50 and the company is looking to raise some capital to expand their operations. The CEO is faced with the following options:

-Option 1: The company can issue a 5-year unsecured debt at an interest rate of 12 percent per annum. The company does not have any quality tangible asset to pledge as collateral in order to issue a lower interest rate secured debt.

-Option 2: The company can issue equity via a private placement where the issue price is 10 percent discount compared to the current market price.

-Option 3: The company can issue a 5-year Convertible Bonds with a face value of $2 and a coupon rate of 8 percent per annum.

Which option is the most appropriate for ABC Ltd given its scenario? Explain why.

(b) "It is often argued that convertible bonds are cheap debt and at the same time enable companies to sell their shares at a premium over the current price" Comment on the validity of this statement.

Reference no: EM132651145

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