Financing Strategy – NBC Institute

FM – May 2017 – L3 – Q4 – Financing Decisions and Capital Markets

Analyze and propose the use of convertible bonds for funding a warehouse project.

Question

You are a financial consultant to a major company based in Kano. The company plans to build a major warehouse in Abuja. You plan to convince the company’s manager to raise the needed funds through a convertible bond issue. Based on the company’s current bond rating of BBB, you have projected the following offer terms:

Maturity: 6 years
Annual Coupon: 1%
Conversion Ratio: 50 shares
Par Value per Bond: ₦1,000
Issue Price: 98% of par value
Current Stock Price: ₦16
Risk-free Rate: 0.5%
Coupon on Straight Bonds: 2% (trading at par)

The proposal suggests raising up to ₦20,000,000. However, with key financial ratios close to the boundaries of the rating category, offering the full amount could threaten the BBB rating.

Given an average business risk profile, the following rating guidelines apply:

Rating Category	Minimum Interest Cover	Default Spread
BBB	2.39	0.5%
BBB-	2.04	1.0%

Selected Financial Data about the Company:

Estimated EBIT: ₦2,200,000
Current Interest Expenses: ₦800,000

Required:

a.
i. Determine the value of the convertible bond offer. (5 Marks)
ii. Discuss why the convertible bond cannot generally be considered as “cheap debt” despite its low coupon, given its financing advantage quantified in economic terms. (3 Marks)

b.
i. Compute the company’s current interest coverage ratio. (1 Mark)
ii. How much money should be raised with the convertible bond issue (in thousands of naira) to avoid the threat of a rating downgrade, based on the quoted rating guidelines? (4 Marks)

c. Advise the company on the advantages of convertible bonds for companies on one hand and for investors on the other hand. (7 Marks)

Answer

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Tags: Convertible Bonds, Financial Ratios, Financing Strategy
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – Nov 2014 – L3 – SB – Q4 – Financing Decisions and Capital Markets

Compare bond issuance methods, steps for IPO success, and Efficient Market Hypothesis application.

Question

A pharmaceutical company wholly owned by the family of Chief Adedutan Jolomi has been in business for many years. The directors have decided to seek quotation on the Alternative Securities Market (ASEM).

A new drug on Ebola Virus Disease (EVD) was developed by the company. The production of the new drug will require more funding since short-term finance will not be sufficient. They believed it was time to introduce the drug into the market.

The directors of the company believed that launching the product would significantly increase the company’s share of the market because the country was anxiously looking forward to an effective EVD drug. Production and launch of this product is costly, and the company’s shareholders may not be able to raise such funds. This informed the directors’ decision to seek additional finance to be sourced partly in corporate bond and partly by the issue of shares.

They plan to issue the corporate bond in the first quarter of 2015 and the shares through an Initial Public Offer (IPO) towards the end of the year 2015. To decide on the appropriate method for the offer, the directors are interested in being educated on the issue.

Required:

(a) Compare and contrast the methods of issuing bonds through private placement and by public offer. State their advantages and advise on which method would be more appropriate in the above situation. (12 Marks)
(b) Advise the directors on the steps that need to be taken to improve the chances and success of its proposed Initial Public Offer (IPO). (4 Marks)
(c) Explain the three forms of Efficient Market Hypothesis (EMH), indicating which of them is most likely to apply in practice. (4 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Corporate Bonds, EMH, Financing Strategy, IPO, Private placement, Public offer
Level: Level 3

Topic: Financing Decisions and Capital Markets
Series: NOV 2014

FM – May 2017 – L3 – Q4 – Financing Decisions and Capital Markets

Analyze and propose the use of convertible bonds for funding a warehouse project.

Question

Maturity: 6 years
Annual Coupon: 1%
Conversion Ratio: 50 shares
Par Value per Bond: ₦1,000
Issue Price: 98% of par value
Current Stock Price: ₦16
Risk-free Rate: 0.5%
Coupon on Straight Bonds: 2% (trading at par)

The proposal suggests raising up to ₦20,000,000. However, with key financial ratios close to the boundaries of the rating category, offering the full amount could threaten the BBB rating.

Given an average business risk profile, the following rating guidelines apply:

Rating Category	Minimum Interest Cover	Default Spread
BBB	2.39	0.5%
BBB-	2.04	1.0%

Selected Financial Data about the Company:

Estimated EBIT: ₦2,200,000
Current Interest Expenses: ₦800,000

Required:

c. Advise the company on the advantages of convertible bonds for companies on one hand and for investors on the other hand. (7 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Convertible Bonds, Financial Ratios, Financing Strategy
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – Nov 2014 – L3 – SB – Q4 – Financing Decisions and Capital Markets

Compare bond issuance methods, steps for IPO success, and Efficient Market Hypothesis application.

Question

Required:

Answer

Find Related Questions by Tags, levels, etc.

Tags: Corporate Bonds, EMH, Financing Strategy, IPO, Private placement, Public offer
Level: Level 3

Topic: Financing Decisions and Capital Markets
Series: NOV 2014

Question Tag: Financing Strategy

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FM – May 2017 – L3 – Q4 – Financing Decisions and Capital Markets

Analyze and propose the use of convertible bonds for funding a warehouse project.

FM – Nov 2014 – L3 – SB – Q4 – Financing Decisions and Capital Markets

Compare bond issuance methods, steps for IPO success, and Efficient Market Hypothesis application.

FM – May 2017 – L3 – Q4 – Financing Decisions and Capital Markets

Analyze and propose the use of convertible bonds for funding a warehouse project.

FM – Nov 2014 – L3 – SB – Q4 – Financing Decisions and Capital Markets

Compare bond issuance methods, steps for IPO success, and Efficient Market Hypothesis application.

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Analyze and propose the use of convertible bonds for funding a warehouse project.

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FM – Nov 2014 – L3 – SB – Q4 – Financing Decisions and Capital Markets

Compare bond issuance methods, steps for IPO success, and Efficient Market Hypothesis application.

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FM – May 2017 – L3 – Q4 – Financing Decisions and Capital Markets

Analyze and propose the use of convertible bonds for funding a warehouse project.

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FM – Nov 2014 – L3 – SB – Q4 – Financing Decisions and Capital Markets

Compare bond issuance methods, steps for IPO success, and Efficient Market Hypothesis application.

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