When using convertible bond as a way of raising finance

Assignment Help Financial Management

Reference no: EM131552277

Prospect Corporation is a venture capital company.It was incorporated and listed on the GrowthEnterprise Market (GEM) four years ago.Since incorporation, the company has been rather successful and its shares are currently trading at $4.5 per share.

Apart from ordinary shares, Prospect has issued 8% convertible bond, redeemable in 2020.The face value of the convertible bond is $1,000, with coupons payable semi-annually and a conversion price of $5.Conversion may take place at any time over the next two years. Current market price of Prospect’s convertible bond is $950.Yield to maturity of coupon bonds of a similar risk profile is 10%.

Assume now is the end of 2010 and bond interest has already been paid.The board of directors expect Prospect’s share price to rise at 12% per year.No dividend is anticipated for coming two years.

(a) As a holder of Prospect’s convertible bond, which of the following actions would you choose to maximize the value of your investment?Explain your decision with a comparison of payoff from each action.

(i) Hold the bond until maturity

(ii) Sell the bond immediately

(iii) Convert the bond to shares now

(iv) Convert the bond at the end of second year.

(b) Explain the differences in payoffs from actions (i), (ii) and (iii).

Reference no: EM131552277

Questions Cloud

Define the net present value : A machine can be purchased for $1 million. The cost of capital is 10%. What is the net present value?

Company capital structure and other financial information : It is assumed that this company will stop its growth in 10 years. If it sells to other company at that time, how much should it ask for

Disadvantages of issuing convertible bonds : What are the advantages and disadvantages of issuing convertible bonds?

Agreement to pay floating rate and receive fixed rate : uyer Limited design to sign an interest rate swap agreement to pay a floating rate and receive a fixed rate.

When using convertible bond as a way of raising finance : What are the factors to be considered when using convertible bond as a way of raising finance?

What set of weights yields a portfolio with zero variance : Stock A has an expected return of 10% and a standard deviation of 10%. What set of weights yields a portfolio with a zero variance?

Risk free rate and market risk premium : If the risk free rate is 5 percent and the market risk premium is 7 percent, are these stocks correctly priced.

Mid-twenties and a moderate conservative investor : Determine where you are personally in your financial goals as someone in their mid-twenties and a moderate conservative investor.

Payback and discounted payback : The company above is considering a 5 year project which would require an initial outlay of $800,000 for the manufacturing equipment.

User Account

All Pages