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LIAM Bhd. issued RM50 million of 6% bonds which are redeemable at a 10% premium to...

LIAM Bhd. issued RM50 million of 6% bonds which are redeemable at a 10% premium to their nominal value of RM100 in 6 years’ time. Alternatively, each bond can be converted into ordinary shares of the company within the next 4 years. The current share price of LIAM is RM4 and this is expected to grow at a rate of 2% per year for the foreseeable future. The conversion price is RM5 per share. The company’s cost of debt is 4% per annum.

Analyse:

(i) The market value for each RM100 convertible bond if the conversion is likely to take place.

(ii) The floor value for each RM100 convertible bond.

Solutions

Expert Solution

(i) Share Price after 4 years 4.32972864 (4*(1.02^4)
Conversion price 5.00
Number of shares received per bond 20 (100/5)
Market price of the shares received per Bond 86.5945728 (4.32972864*20)
Terminal cash flow after conversion at end of 4 years 86.5945728
Present Value of cash flows if conversion takes place                    95.80 (Using PV function of excel with Rate=4%,Nper=4, Pmt=-6, FV=-86.5945728)
Market value for each RM100 convertible bond if the conversion takes place                    95.80 RM
(ii) COMPUTATION OF FLOOR VALUE OF BOND
Face Value of Bond 100
Number of Bonds 500000 (50000000/100)
Annual Coupon payment per bond 6 (0.06*100)
Number of years to maturity 6
Terminal payment on maturity per bond 110 (1.1*100)
Cost of debt 4.00%
Present Value (PV) of future cash flow at market yield(Cost of debt) of 4%                  118.39 (Using PV function of excel with Rate=4%,Nper=6, Pmt=-6, FV=-110)
Floor Value of each RM 100 convertible Bond                  118.39 RM

jeff jeffy answered 1 year ago
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