Convertible Bond Chapter 4 PDF

Chapter 4 Convertible Bond INTRODUCTION Convertible bond(CB) is a bond which can be converted into company’s common shares Bond common shares When CB is converted, it will increase number of outstanding shares in the company, therefore it will give effect to company’s earning per share(E...

Chapter 4 Convertible Bond INTRODUCTION Convertible bond(CB) is a bond which can be converted into company’s common shares Bond common shares When CB is converted, it will increase number of outstanding shares in the company, therefore it will give effect to company’s earning per share(EPS) Reason for Issuing Convertible Bond ► The conversion feature make it more attractive to investors and enhance marketability of convertible bond ► Since it allow the holder the opportunity to become shareholder, it can be sold at lower interest rates than ordinary bonds ► Fewer restrictive covenants than non convertible ► Firms can defer the issuance of new common stocks until market price increased. Thus, firms needs only to issue fewer shares Advantages and Disadvantages Investing in Convertible Bonds Advantages ► Current income greater than dividend in common stock ► Allow convertible bondholder to convert the bond into shares ► Combination of fixed income and price appreciation in common stock ► Compared to common stockholder, convertible bondholders enjoy yield advantages while waiting for appreciation in stock price. Disadvantages ► Investor may have to give up some potential profits in the event of forced conversion ► Interest rates usually lower than ordinary bond ► If market stock price did not go beyond the conversion price, the conversion may unattractive to investor because they may lose opportunity for capital gain CONVERTIBLE BOND FEATURES 5 CONVERTIBLE BOND 6 CONVERTIBLE BOND 7 Example Coral Bhd has decided to issue RM100 million convertible bonds that pays a 6 percent coupon rate and mature in 10 years. The conversion price is RM 25 per share. The company's common share is currently selling at RM15.00. The firm's operating profit is RM20 million and expected to increase by 20 percent after issuing convertible bonds. Currently, the company has 10 million shares outstanding and tax rate at 30 percent. From the information given, calculate: i) Conversion ratio ii) Conversion premium in percentage and RM iii) The conversion value iv) Earnings per share a) Before financing b) Before conversion c) After full conversion d) After 60% conversion Coral Bhd has decided to issue RM100 million convertible bonds that pays a 6 percent coupon rate and mature in 10 years. The conversion price is RM 25 per share. The company's common share is currently selling at RM15.00. The firm's operating profit is RM20 million and expected to increase by 20 percent after issuing convertible bonds. Currently, the company has 10 million shares outstanding and tax rate at 30 percent. From the information given, calculate: i)Conversion Ratio = Par value/ Conversion Price = RM1000/RM25 = 40 shares conversion CKX mp = value = 40x15 = 600  Coral Bhd has decided to issue RM100 million convertible bonds that pays a 6 percent coupon rate and mature in 10 years. The conversion price is RM 25 per share. The company's common share is currently selling at RM15.00. The firm's operating profit is RM20 million and expected to increase by 20 percent after issuing convertible bonds. Currently, the company has 10 million shares outstanding and tax rate at 30 percent. From the information given, calculate: ii)Conversion premium in % = Conversion Price-Market Price x100 Market Price = RM25 – RM15 x 100 =66.7% RM15 OR Conversion premium in % = Par Value- Conversion Value x 100% Conversion Value = RM1000- RM600 x 100% = 66.7% RM600 ii) Conversion premium in RM = Par Value- Conversion Value = RM1000-RM600 = RM400 OR Conversion premium in RM = Conversion Price-Market Price per share = RM25 – RM15 = RM10 Coral Bhd has decided to issue RM100 million convertible bonds that pays a 6 percent coupon rate and mature in 10 years. The conversion price is RM 25 per share. The company's common share is currently selling at RM15.00. The firm's operating profit is RM20 million and expected to increase by 20 percent after issuing convertible bonds. Currently, the company has 10 million shares outstanding and tax rate at 30 percent. From the information given, calculate: iii)Conversion Value = Conversion Ratio x Market price = 40 x RM15 = RM600 iv)Coral Bhd has decided to issue RM100 million convertible bonds that pays a 6 percent coupon rate and mature in 10 years. The conversion price is RM 25 per share. The company's common share is currently selling at RM15.00. The firm's operating profit is RM20 million and expected to increase by 20 percent after issuing convertible bonds. Currently, the company has 10 million shares outstanding and tax rate at 30 percent. From the information given,calculate: dahqual , semua bond ni 60 ? belum convert fukar share holder & 2004 (iv) Before Before After Full After 60% OLD EBIT=RM20M increase 20% = Financing Conversion Conversion Conversion RM24M(NEW EBIT) 20 + y = 24 EBIT 20 M 24 M 24 M 24 M INTEREST= COUPON RATE X VALUE & CB IN RM - Interest 0 6M 0 2.4 M = 6% X RM100M =RM6M EBT 20 M 18 M 24 M 21.6 M *If 60% conversion, RM6M x40%= RM2.4M -Tax (30%) 6M 5.4 M 7.2 M 6.48 M NO. OF NEW SHARES= VALUE CB IN RM EAT 14M 12.6 M 16.8 M 15.12M CONVERSION PRICE -PREFERRED 0 0 0 0 = RM100M/RM25 DIVIDEND = 400,000 SHARES NI = NO *If 60% conversion, 400,000 x 60%=240,000 EPS 14M/10M 12.6M/10M 16.8 M/ 15.12M/ shares 10.4 M 10M+240k RM 1.40 RM 1.26 RM 1.20 RM 1.48 EPS = EAT- PREFERRED DIVIDEND NO. OF SHARES ehit : zom : 20 % incher Exercise ANSWER a) RM 25 b) 40 shares c) RM800 d)Value= RM200 Percentage= 25% e) i) RM 1.7656 ii)RM 0.7096 iii)RM 1.0861 iv)RM1.4240 THE END