...value per share? 2 An added fact l On September 30, 1997, Microsoft had 258 million options outstanding, granted to employees over time. These options had an average exercise price of $ 42 (the current stock price i $ 140). Estimate the value per share. 3 Equity Value and Per Share Value l l The conventional way of getting from equity value to per share value is to divide the equity value by the number of shares outstanding. This approach assumes, however, that common stock is the only equity claim on the firm. In many firms, there are other equity claims as well including: – warrants, that are publicly traded – management and employee options, that have been granted, but do not trade – conversion options in convertible bonds – contingent value rights, that are also publicly traded. l The value of these non-stock equity claims has to be subtracted from the value of equity before dividing by the number of shares outstanding. 4 Warrants l l l A warrant is a security issued by a company that provides the holder with the right to buy a share of stock in the company at a fixed price during the life of the warrant. A warrant is therefore a long term call option on the equity of the firm and can be valued using option pricing models. Warrants and other equity options issued by the firm are claims on the equity of the firm and have to be treated as equity, which has relevance for: – estimating debt and equity for the leverage calculation...
Words: 1339 - Pages: 6
...1991, Indian companies were not allowed to raise capital from overseas capital market. For their foreign exchange requirements, they had to depend on government financial institutions, foreign banks, international development agencies etc. By the middle of 1991, the process of liberalization of Indian economy was set in motion by the government and now the Indian Corporate is allowed to issue equity or bonds in overseas capital market. The term ‘Euro Issue’ denotes that the issue is made abroad through foreign currency denominated securities and the securities are listed on any overseas stock exchange. The Indian companies get their issues listed on LUXEMBOURG stock exchange. Subscription for such securities can come from any part of world, except India. Companies making Euro Issue can issue depositary receipts, foreign currency convertible bonds or pure debt bonds. Pure debt is not preferred by the investors for two reasons: (i) No Capital appreciation, and (ii) low credit rating of India by various international agencies. Depository receipts and foreign currency convertible bonds are more popular among the investors. Depository receipts are of two types: (i) Global depository receipt and (ii) American depository receipt. 2 Q. No.1 : Write a note on Global Depository receipts. (May 1996, May, 2003, 2008) May 2004 Nov. 2008) Answer A GDR is negotiable certificate that represents...
Words: 3380 - Pages: 14
...restricts the use of assets. The restrictions placed on assets are one rational for separating both secured and unsecured debt items. b. Guaranteed debt can be defined as debt that has a guarantor or a secondary promise to pay the debt in the event the borrower defaults. Rite Aid’s subsidiaries have provided the guarantee according to note 11 of the 10K report. c. Senior - senior debt describes the debt first repaid in the event of bankruptcy. Senior is simply a term to describe a position of repayment in the event of bankruptcy. Fixed Rate – fixed rate refers to the interest rate on outstanding debt. If debt is fixed the interest rate is set at a predetermined rate and will not change regardless of market conditions. Convertible – the term convertible debt refers to debt that can be converted to equity shares. d. Rite Aid has a vast array of different debt in order to match future cash flows with debt payments. The inherent risk associated with each form of debt is different. As such the varying risk results in a vast array of interest rates. All things equal as risk increases, rates increase. Rite Aid’s large amount of debt also may explain why they hold...
Words: 1268 - Pages: 6
...is expected that you will attached an assignment cover sheet to each assignment you submit. Page 2 Table of Contents EXECUTIVE SUMMARY 1. INTRODUCTION 2. NATURE OF CONVERTIBLE BONDS 3. FINANCIAL ADVANTAGES AND DISADVANTAGES 3.1 3.2 ADVANTAGES DISADVANTAGES ii 1 1 2 2 2 3 5 5 6 7 4. ACCOUNTING TREATMENT 5. LOGIC OF THE ACCOUNTING REQUIREMENTS 6. CONCLUSION 7. RECOMMENDATIONS REFERENCES (i) Page 3 EXECUTIVE SUMMARY This report provides information about convertible bonds for the managers of Hamilton Manufacturing. Included is information about the nature of convertible bonds, financial advantages and disadvantages Hamilton could expect from issuing such bonds, and their accounting treatment. A convertible bond is a debt security that carries the option of exchange for an equity security, usually common stock. The bond indenture specifies when the bonds may be converted and a conversion price or ratio. The conversion price is usually from 10 to 20 percent above the market price of the common stock at the time of issue. Both the issuer and the investor expect the market price of the stock to rise above the conversion price; therefore, bondholders are likely to convert the bond into equity. Convertible bonds would offer Hamilton three advantages: ▪ The company could issue the bonds at a premium or at a low stated interest rate, which investors would accept because of the conversion privilege. ▪ The company could avoid another stock issue now, when...
Words: 2327 - Pages: 10
...issuing a bond relative to stock is that the bond interest payments are tax deductible. True False 2. Issuing bonds dilutes the voting power of the common shareholders because bonds have preferential voting rights. True False 3. The major disadvantages of issuing a bond are the risk of bankruptcy and the negative impact on cash flow because debt must be repaid at a specified date in the future. True False 4. A bond's interest payments are determined by multiplying the bond's principal amount by the stated interest rate. True False 5. A convertible bond can be called for early retirement at the option of the issuing company. True False 6. The issuing company and the bond underwriter determine the selling price of a bond. True False 7. The issuance price of a bond is the present value of both the principal plus the cash interest to be received over the life of the bond discounted by the stated (coupon) rate. True False 8. When the market rate of interest is greater than the stated interest rate, the bond will sell at a discount. True False 9. A bond will sell for a premium when the market rate of interest is greater than the stated rate of interest. True False 10. The proceeds received from a bond issue will be greater than the bond maturity value when the stated interest rate exceeds the market rate of interest. True False 11. Increases in the market rate of interest subsequent to a bond issue increase the discount on the bond. True...
Words: 23435 - Pages: 94
...External Commercial Borrowing is a very broad term used for borrowing money from foreign markets, money may be borrowed via bonds,debentures,floating rate notes etc.while Foreign currency convertible bond is a bond issued in foreign currency which acts like a normal bond with regular coupon and principal repayment also gives an option to the investor to convert it into the company,s stock. External Commercial Borrowings (ECBs) include bank loans, suppliers' and buyers' credits, fixed and floating rate bonds (without convertibility) and borrowings from private sector windows of multilateral Financial Institutions such as International Finance Corporation. Euro-issues include Euro-convertible bonds and GDRs. In India, External Commercial Borrowings are being permitted by the Government for providing an additional source of funds toIndian corporates and PSUs for financing expansion of existing capacity and as well as for fresh investment, to augment theresources available domestically. ECBs can be used for any purpose (rupee-related expenditure as well as imports) except for investment in stock market and speculation in real estate. External Commercial Borrowings (ECB) are defined to include commercial bank loans, buyer’s credit, supplier’s credit, securitised instruments such as floating rate notes, fixed rate bonds etc., credit from official export credit agencies, commercial borrowings from the private sector window of multilateral financial institutions...
Words: 453 - Pages: 2
...Question 1 a) The starting point for this case is to determine the total market values for Virginia May. Therefore, the relevant information about notes payable, long term debt and total common equity are taken into consideration, which are provided in Table 1 of the case. Table 2 indicates a total market values of 392.650.378,84€, which is 81.637.621,16€ les compared to the belonging book values. While the book value of notes payables is the same for the market value, the long term debt as well as the total common equity differ in this respect. Using the formula provided in the case the present value (PV) for the bond is equal to 889,09€. By multiplying the PV of the bond with the number of bonds, equal to 220.000, the market values of the long term debt is calculated. Multiplying the shares outstanding with the share price of 17,45€ the market values of equity can be calculated. Summing up all the calculated market values, the bottom line is the current market values provided in Table 2. b) Once all the steps described above are done, one can use this information to calculate the weighted average cost of capital (WACC). Table 3 of the appendix shows the different weights for each category. Taking into account the relevant information about the cost of each category, it is easy to multiply them with the weights. Summing up all three pre-tax values, one ends up with a pre-tax WACC of 12,54 percent. Given the information that the marginal tax rate for Virginia May is 40 percent...
Words: 2423 - Pages: 10
...3. i) Contrast the effect on the price of both bonds if yields decline more than 100 basis points. (No calculations required.) (5 marks) If bond yields decline more than 100 basis points, the price of a straight bond will increase more than that of a similar bond with a call option. Callable bonds exhibit price compression as yields decline. As bond yields decline, interest payments become more uncertain as the likelihood that the issuer will call the bond increases. Therefore, upside price appreciation is limited. If bond yields decline more than 100 basis points, Callable Corp will recall the bonds because the debt could be refinanced at a lower interest rate. Please see the chart in the below: [pic] As one may observe, callable bond prices rise at a decreasing rate as yields decline and exhibit negative convexity (red line). ii) State and explain under which future interest rate environments would the Callable Corp. bond be preferable to the Straight Corp. bond. (5 marks) Through an investor’s perspective, the Callable Corp. bond would be preferable to the Straight Corp. bond during a stable or increasing interest rate environment. Callable Corp.’s bond pays a 4.25% coupon payment versus Straight Corp’s 4.00% coupon bond. This is not a surprise because issuers will pay a slightly higher interest rate than would be necessary for a similar straight bond to compensate for uncertainty (prepayment risk). Therefore, if interest...
Words: 724 - Pages: 3
...India Forex Advisors IFA Classroom - Day 15 Dated- 5th July, 2013 Key Highlights: What is FCCB ? Trend of FCCB Recent Complications What is FCCB ? A Foreign Currency Convertible Bond (FCCB) is a type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. Advantages The issuer pays the interest and the principal at a lower interest rate. More importantly, it can convert the bond into equities. The issuing company gets the benefit of raising money form the foreign markets, thus opening another source of financing. Disadvantages The exchange risk is more in FCCB’s as interest on bond would be payable in foreign currency. FCCB’s means the creation of more debt and a forex outage in terms of interest which is in foreign exchange. In case of convertible bond the interest rate is low (around 3 to 4 per cent) but there is exchange risk on interest as well as principal if the bonds are not converted into equity. If the stock price plummets, investors will not go for conversion but redemption. So, companies have to refinance to fulfill the redemption promise which can hit earnings. It will remain as debt in the balance sheet until conversion. It is a double whammy for the FCCB issuing companies because the weak rupee means not only will the companies have to repay the loans, but there will be an added cost because of...
Words: 732 - Pages: 3
...1) Here, can see that the ROE is mainly driven by the Assets turnover, which keep increasing despite the 2001 crisis. On the other hand, the Operating margins is severely hit by the Internet Bubble with a negative ratio of -19,24% in 2001 and – 44,66% in 2002. This means that €1 of sales generated negative earnings. This is quite understandable with the crisis The leverage ratio on the other hand is increasing until 2001 to reach almost 5 and then become negative in 2002 before going back to its level in 2003. This indicates how much Assets can be used with €1 of Equity and despite the negative number in 2002, the ratio remains quite strong. Then, let’s analyse the leverage effect. The ratio remains is increasing from 1999 where it is almost 50% debt -50% Equity financing to a ratio of 4,24 in 2003 (4 times more debt than Equity!), except in the aftermath of the crisis in 2002 where the ratio was negative due to negative equity. This can be explaining by a strong in-debtment from France Telecom to make up for a decrease in earnings and to finance acquisitions. As a result, France Telecom appears heavily indebt. Regarding the ROCE (Return on Capital Employed), it is lower than the ROE but doesn’t suffer from the crisis: this indicates the ability of France Telecom to make up for the difficult time. Moreover, the ROCE with debt is twice as big as the ROCE without debt in 1999, 2000, 2001, which is a proof on the positive effect of debt. However, it become negative...
Words: 2726 - Pages: 11
...Case 41, MoGen, Inc. – Finance 675 David Biggs, Amanda McAllaster, Jake Unruh, Andy Rao Background Information MoGen is a leading company in the recently surging biotechnology industry that specializes in human therapeutic drugs that help offset the damaging effects of chemotherapy for cancer patients. The business model for all biotech companies is fairly similar: through extensive R&D, create new medical drugs, obtain FDA approval and product patents and launch them into the market. In order to achieve profitability and increase the likelihood of FDA approval for their various projects, MoGen must ensure a consistent supply of cash to fund R&D efforts and maintain financial flexibility in the face of the high levels of uncertainty that the industry as a whole faces. The biotech industry is truly what one would describe as a high-risk, high-reward venture. Because Mogen and the rest of the industry faces strict and rigorous standards set by the FDA, projects often fail or have extremely long lead-times, making investments riskier and additional compensation a must compared to most other industries. Many research efforts lead to failed projects due to FDA rejection and other projects face the threat of “biosimilars,” which are essentially copies of the drugs, once the product reaches the end of the patent-protection period. At the time, MoGen had several drugs that faced the threat of biosimilar competition in Europe, all due to patent expiration...
Words: 2077 - Pages: 9
...drafts of a proposal for a convertible debt offering by MoGen, Inc. As a leading biotechnology company in the United States, MoGen had become an important client for Merrill Lynch over the years. In fact, if this deal were to be approved by MoGen at $5billion, it would represent Merrill Lynch’s third financing for MoGen in four years with proceeds raised totaling $10 billion. Moreover, this “convert” would be the largest such single offering in history. The proceeds were earmarked to fund a variety of capital expenditures, research and development expenses, working capital needs, as well as a share repurchase program. The Merrill Lynch team had been working with MoGen’s senior management to find the right tradeoff between the conversion feature and the coupon rate for the bond. Maanavi knew from experience that there was no “free lunch” when structuring the pricing of a convertible. Issuing companies wanted the conversion price to be as high as possible and the coupon rate to be as low as possible; whereas investors wanted the opposite: a low conversion price and a high coupon rate. Thus, the challenge was to structure the convert to make it attractive to the issuing company in terms of its cost of capital, while at the same time selling for full price in the market. Maanavi was confident that the right balance in the terms of the convert could be found, and he was also confident that the convert would serve MoGen’s financing needs better than a straight bond or equity issuance. But...
Words: 582 - Pages: 3
... 14. Beta coefficient and cost of equity 15. Discounted cash flow analysis and implication of fundings 4. Recommendation ------------------------------------------------- 1. COMPANY PROFILE 1.1 Core activities MISSION: "To be the leading international airlines group in future industry consolidation on a regional and a global scale" International Airlines Group (IAG) is one of the world's largest airline groups: with 377 aircraft and an average of 69 million passengers each year flying to 230 different destinations, IAG is the third- largest based in Europe and the sixth in the world. Formed in January 2011 as a result of the merger between British Airways and Iberia, it is a Spanish registered company whose shares are traded on the London and Spanish Stock Exchanges and with its head office in London (UK). Active in the airlines and transportation service sector, IAG is also a major conveyors of air - cargo serving 350 destinations across 80 countries. Following the initial merger between British Airways and Iberia, IAG completed its first acquisition in 2012 with bmi being integrated into British Airways. As an international group, IAG...
Words: 2310 - Pages: 10
...Brief History of the Gold Standard in the United States Craig K. Elwell Specialist in Macroeconomic Policy June 23, 2011 Congressional Research Service 7-5700 www.crs.gov R41887 CRS Report for Congress Prepared for Members and Committees of Congress Brief History of the Gold Standard in the United States Summary The U.S. monetary system is based on paper money backed by the full faith and credit of the federal government. The currency is neither valued in, backed by, nor officially convertible into gold or silver. Through much of its history, however, the United States was on a metallic standard of one sort or another. On occasion, there are calls for Congress to return to such a system. Such calls are usually accompanied by claims that gold or silver backing has provided considerable economic benefits in the past. This report briefly reviews the history of the gold standard in the United States. It is intended to clarify the dates during which the standard was used, the type of gold standard in operation at the various times, and the statutory changes used to alter the standard and eventually end it. It is not a discussion of the merits of such a system. The United States began with a bimetallic standard in which the dollar was defined in terms of both gold or silver at weights and fineness such that gold and silver were set in value to each other at a ratio of 15 to 1. Because world markets valued them at a 15½ to 1 ratio, much of the gold left the country and...
Words: 9112 - Pages: 37
...Question 4. At its most basic level hedging is a strategy aimed at reducing potential significant losses (and gains) of an individual and/or organisation. In the world of sports betting this can mean covering a bet you have made on team A by backing team B at some point in the contest to ‘hedge’ your position. In finance there are numerous strategies used, a number of which I will explain later. The goal of a hedge fund is to generate positive returns no matter what the market does. A hedge fund can be described as an “actively managed private investment fund that seeks positive attractive returns”. Frush, Scott. (2006). Understanding Hedge Funds. Ann Logue differentiates them from other investment tools, “They differ from so called ‘real money’ traditional investment accounts such as mutual funds, pensions, endowments and so forth, because they have more freedom to pursue different investment strategies”. Logue, Ann C. (2006). Hedge Funds For Dummies. This comment is valid as for the most part they are not as heavily regulated as other investment institutions. In his book Investing in Hedge Funds (2005), Joseph Nicholas asserts that in days gone by the term hedge fund is actually used to describe both a structure that is “a co-mingled investment fund” and a strategy. Today, however he argues that it is best describes the context of the structure of the investment and the strategy used to help the strategy come to fruition. Similar to most private equity funds hedge funds...
Words: 2210 - Pages: 9
