Topic: Financing Decisions and Capital Markets

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FM – May 2016 – L3 – Q7 – Financing Decisions and Capital Markets

Comparing the cost of financing equipment replacement through an outright purchase funded by a loan versus a finance lease.

Question

MK Plc is considering the best way to finance the replacement for a particular high specification piece of equipment that has become too costly to maintain. The replacement equipment is estimated to have a useful life of 4 years with no residual value after that time.

Two alternative financing schemes are being evaluated:

Scheme A: Buy the equipment outright funded by a bank loan
Scheme B: Enter into a four-year finance lease

Scheme A: Buy outright, funded by a bank loan
MK Plc could purchase the equipment outright at a cost of N200 million on July 1, 2016. MK Plc can normally borrow at an annual interest rate of 13% per year.

Scheme B: Four-year finance lease
The equipment would be delivered on July 1, 2016, and MK Plc would pay a fixed amount of N58,790,000 each year in advance, starting on July 1, 2016, for four years. At the end of four years, ownership of the equipment will pass to MK Plc without further payment.

Other Information:

MK Plc has a cost of equity of 20% and WACC of 16%
MK Plc is liable to company tax at a marginal rate of 30%, which is settled at the end of the year in which it arises
Tax depreciation allowances on the full capital cost are available in equal instalments over the first four years of operation

You are required to:

a.

Calculate which payment method is expected to be cheaper for MK Plc and recommend which should be chosen solely on the present value of the two alternatives as at July 1, 2016. (13 Marks)

b.

Discuss the appropriateness of the discount rate used in (a). (2 Marks)

Answer

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Tags: Discount rate, Equipment Financing, Financing, Lease, Loan, Present Value
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – May 2016 – L3 – Q5 – Financing Decisions and Capital Markets

Preparation of a report identifying factors in choosing the appropriate debt finance mix and restrictions on debt raising for a company.

Question

BADEJO Limited, a small company, is currently considering a major capital investment project for which additional finance will be required. It is not currently feasible to raise additional equity finance, consequently debt finance is being considered. The decision has not yet been finalized whether this debt finance will be short or long term and whether it will be at fixed or variable rates. The financial controller has asked you, as the company’s Accountant, to prepare a report for the forthcoming meeting of the board of directors.

You are required to:

a.

Prepare a draft report to the board of directors which identifies and briefly explains:
The main factors to be considered when deciding on the appropriate mix of short, medium, or long-term finance for BADEJO Limited. (8 Marks)

b.

The practical considerations which could be factors in restricting the amount of debt BADEJO Limited could raise. (7 Marks)

Answer

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Tags: Capital Investment, Debt Capacity, Debt Finance, Financing Mix, Long-Term Finance, Short-term Finance
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – May 2016 – L3 – Q3 – Financing Decisions and Capital Markets

Calculation of bond issue price, yield to maturity, and duration, and discussion of conflicts between shareholders and bondholders.

Question

(a)

Skylet Limited is a major player in the aviation industry with a credit rating of AA. The company plans to raise ₦5 billion from the bond market. The features of the bond are:

Maturity: 4 years
Coupon payment: Annual
Coupon rate: 5%
Redemption value: Par

The current annual spot yield curve for government bonds is as follows:

Term	Spot Rate
One-year	3.3%
Two-year	3.8%
Three-year	4.5%
Four-year	5.3%

The following table of spreads (in basis points) is given for the aviation industry:

Rating	1 Year	2 Year	3 Year	4 Year
AAA	12	23	36	50
AA	27	40	51	60
A	43	55	67	80

You are required to calculate:
i. The issue price of the bond. (6 Marks)
ii. The yield to maturity. (3 Marks)
iii. The duration. (6 Marks)

(b)

Discuss why conflicts of interest might exist between shareholders and bondholders. (5 Marks)

Answer

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Tags: Bond pricing, Credit Rating, Duration, Shareholder-Bondholder Conflict, Spot Rates, Yield to Maturity
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – May 2016 – L3 – Q2 – Financing Decisions and Capital Markets

Analysis of the impact of a rights issue on shareholder wealth, financial ratios, and evaluation of its appropriateness.

Question

BeeJay Plc is a medium-sized manufacturing company which is considering a 1-for-5 rights issue at a 15% discount to the current market price of ₦4.00 per share. Issue costs are expected to be ₦220,000, and these costs will be paid out of the funds raised. It is proposed that the funds raised from the rights issue will be used to redeem some of the existing debentures at par.

(a)

Ignoring issue costs and any use that may be made of the funds raised by the rights issue, calculate:
i. the theoretical ex-rights price per share.
ii. the value of the rights per existing share. (3 Marks)

(b)

Calculate the current earnings per share and the revised earnings per share if the proceeds of the rights issue are used to redeem some of the existing debentures. (4 Marks)

(c)

Evaluate whether the proposal to redeem some of the debentures would increase the wealth of the shareholders of BeeJay Plc. Assume that the price/earnings ratio of BeeJay Plc remains constant. (2 Marks)

(d)

Discuss the reason why a rights issue could be an attractive source of finance for BeeJay Plc. Your discussion should include an evaluation of the effect of the rights issue on the debt/equity ratio and interest cover. (11 Marks)

Answer

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Level: Level 3

Topic: Financing Decisions and Capital Markets

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 – May 2017 – L3 – Q2 – Financing Decisions and Capital Markets

Calculate gearing ratio, rights issue impacts, and shareholder implications.

Question

LL Plc. is a large engineering company. Its ordinary shares are quoted on the Stock Exchange.

LL Plc.’s Board is concerned that the company’s gearing level is too high and that this is having a detrimental impact on its market capitalisation. As a result, the Board is considering a restructuring of LL Plc.’s long-term funds, details of which are shown here as at 28 February, 2017:

Funding Source	Total Par Value (₦m)	Market Value
Ordinary Share Capital (50k)	67.5	₦2.65/share ex-div
7% Preference Share Capital (₦1)	60.0	₦1.44/share ex-div
4% Redeemable Debentures (₦100)	45.0	90% ex-int

The debentures are redeemable in 2022. LL Plc.’s earnings for the year to 28 February, 2017 were ₦32.4 million and are expected to remain at this level for the foreseeable future. Retained earnings, as at 28 February, 2017 were ₦73.2 million.

The Board is considering a 1 for 9 rights issue of ordinary shares, and this additional funding would be used to redeem 60% of LL Plc.’s redeemable debentures at par. However, some of LL Plc.’s directors are concerned that this issue of extra ordinary shares will cause the company’s ordinary share price and its earnings per share (EPS) to fall by an excessive amount, to the detriment of LL Plc.’s shareholders. Accordingly, they are arguing that the rights issue should be designed so that the EPS is not diluted by more than 5%.

The Directors wish to assume that the income tax rate will be 21% for the foreseeable future and the tax will be payable in the same year as the cash flows to which it relates.

Required:
a. i. Calculate LL Plc.’s gearing ratio using both book and market values. (5 Marks)

ii. Discuss, with reference to relevant theories, why LL Plc.’s Board might have concerns over the level of gearing and its impact on LL Plc.’s market capitalisation. (6 Marks)

b. Assuming that a 1 for 9 rights issue goes ahead, calculate the theoretical ex-rights price of LL Plc.’s ordinary share and the value of a right. (3 Marks)

c. Discuss the Directors’ view that the rights issue will cause the share price and the EPS to fall by an excessive amount, to the detriment of LL Plc.’s ordinary shareholders. Your discussion should be supported by relevant calculations. (6 Marks)

Answer

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Tags: Capital structure, EPS, Rights Issue, Share Price
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – Nov 2014 – L3 – SC – Q6b – Financing Decisions and Capital Markets

Examine reasons for conflict of interest between shareholders and bondholders.

Question

Discuss any FIVE reasons why conflict of interest may exist between shareholders and bondholders. (5 Marks)

Answer

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Tags: Bondholders, Conflict of Interest, Financing decisions, Governance, Risk Management, Shareholders
Level: Level 3

Topic: Financing Decisions and Capital Markets
Series: NOV 2014

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

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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 2021 – L3 – Q2 – Financing Decisions and Capital Markets

Evaluate financing options for Gap Plc, including rights issue and debt issue, using CAPM, market dynamics, and strategic implications.

Question

You should assume that the current date is 31 December 2019.
You work for Eko Corporate Finance (ECF). One of the clients for whom you are responsible is Gap Plc (GP).

Gap Plc is a listed company and is seeking to raise ₦560 million to invest in new projects during 2020. Currently, Gap Plc is financed by equity. However, at a recent board meeting, the finance director stated that, since other companies in Gap Plc’s industry have average gearing ratios (measured by debt/equity by market value) of 30% (with a maximum of 40%) and an average interest cover of 6 times (with a minimum of 5 times), perhaps the company should access the debt markets. The finance director presented to the board two alternative sources of finance to raise the ₦560 million.

Equity Issue:
The ₦560 million would be raised by a 1 for 2 rights issue, priced at a discount on the current market value of GP’s shares.

Debt Issue:
The ₦560 million would be raised by an issue of 7% coupon bonds, redeemable on 31 December 2029. The yield to maturity (YTM) of the bonds would be equal to the YTM of the bonds of Eko Ventures (EV), another listed company in Gap Plc’s market sector. Eko Ventures has a similar risk profile to Gap Plc and has recently issued its bonds. Eko Ventures’ bonds have a coupon of 7%, will be redeemed in four years at par, and their current market price is ₦110 per ₦100 nominal value.

There were concerns expressed by a number of board members regarding the debt issue since it has been the long-standing policy of the company not to borrow. Their concerns were how Gap Plc’s shareholders and the stock market would react. The company’s cost of capital would increase as a result of the borrowing, leading to a fall in the company’s value.

An extract from Gap Plc’s most recent management accounts is shown below:

₦m
Operating profit	200
Taxation at 20%	(40)
Profit after tax	160

Additional Information:

Gap Plc has an equity beta of 1.1
The risk-free rate is expected to be 3% p.a.
The market return is expected to be 8% p.a.
Gap Plc’s current share price is ₦5 per share ex-dividend.
Gap Plc has 320 million ordinary shares in issue.

Required:

a. Calculate, using the CAPM, Gap Plc’s cost of capital on 31 December 2019. (1 Mark)

b. Assuming a 1 for 2 rights issue is made on 1 January 2020:
i. Calculate the discount the rights issue represents on Gap Plc’s current share price. (1 Mark)
ii. Calculate the theoretical ex-rights price per share. (1 Mark)
iii. Discuss whether the actual share price is likely to be equal to the theoretical ex-rights price. (4 Marks)

c. Alternatively, assuming debt is issued on 1 January 2020:
i. Calculate the issue price and total nominal value of the bonds that will have to be issued to give a YTM equal to that of Eko Ventures’ bonds in the above calculation. (5 Marks)
ii. Discuss the validity of the use of the YTM of Eko Ventures’ bonds in the above calculations. (3 Marks)

d. Outline the advantages and disadvantages of the two alternative sources for raising the ₦560 million, discuss the concerns of the board regarding the bond issue (using the gearing and interest cover information provided by the finance director), and advise Gap Plc’s board on which source of finance should be used. (5 Marks)

Answer

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Tags: CAPM, Debt Financing, Gearing Ratio, Interest Cover, Rights Issue
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – May 2022 – L3 – Q2 – Financing Decisions and Capital Markets

Evaluate the financing options for Effe's expansion and provide advice on creditworthiness for a bond investment.

Question

Effe is a Nigerian company specialising in the provision of information systems solutions to large corporate organisations. It is going through a period of rapid expansion and requires additional funds to finance the long-term working capital needs of the business.

Effe has issued one hundred million N1 ordinary shares, which are listed on the stock market at a current market price of N15 with typical increases of 10% per annum expected in the next five years. Dividend payout is kept constant at a level of 10% of post-tax profits. Effe also has N1,000 million of bank borrowings.

It is estimated that a further N300 million is required to satisfy the funding requirements of the business for the next five-years beginning July 1, 2021. Two major institutional shareholders have indicated that they are not prepared to invest further in Effe at the present time and so a rights issue is unlikely to succeed. The directors are therefore considering various forms of debt finance. Three alternative structures are under discussion as shown below:

Five-year unsecured bank loan at a fixed interest rate of 7% per annum;
Five-year unsecured bond with a coupon of 5% per annum, redeemable at par and issued at a 6% discount; and
A convertible bond, issued at par, with an annual coupon rate of 4.5% and a conversion option in five years’ time of five shares for each ₦100 nominal of debt.

There have been lengthy boardroom discussions on the relative merits of each instrument. Summarised below are the queries of three different directors concerning the instruments.

Director A: “The bank loan would seem to be more expensive than the unsecured bond. Is this actually the case?”
Director B: “Surely, the convertible bond would be the cheapest form of borrowing with such a low interest rate?”
Director C: “If we want to increase our equity base, why use a convertible bond, rather, than a straight equity issue?”

Required:

a. Write a response to the queries raised by the three directors and advise on the most appropriate financing instrument for Effe. In your answer, include calculations of appropriate yield for each instrument. Ignore tax. (15 Marks)
b. Advise a prospective investor in the five-year unsecured bond issued by Effe on what information he should expect to be provided with and what further analysis he should undertake in order to assess the credit worthiness of the proposed investment. (5 Marks)

Answer

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Tags: Convertible Bonds, Credit Analysis, Debt Instruments, Equity Financing, Yield Calculations
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – May 2016 – L3 – Q7 – Financing Decisions and Capital Markets

Comparing the cost of financing equipment replacement through an outright purchase funded by a loan versus a finance lease.

Question

Two alternative financing schemes are being evaluated:

Scheme A: Buy the equipment outright funded by a bank loan
Scheme B: Enter into a four-year finance lease

Other Information:

MK Plc has a cost of equity of 20% and WACC of 16%
MK Plc is liable to company tax at a marginal rate of 30%, which is settled at the end of the year in which it arises
Tax depreciation allowances on the full capital cost are available in equal instalments over the first four years of operation

You are required to:

a.

Calculate which payment method is expected to be cheaper for MK Plc and recommend which should be chosen solely on the present value of the two alternatives as at July 1, 2016. (13 Marks)

b.

Discuss the appropriateness of the discount rate used in (a). (2 Marks)

Answer

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Tags: Discount rate, Equipment Financing, Financing, Lease, Loan, Present Value
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – May 2016 – L3 – Q5 – Financing Decisions and Capital Markets

Preparation of a report identifying factors in choosing the appropriate debt finance mix and restrictions on debt raising for a company.

Question

You are required to:

a.

b.

The practical considerations which could be factors in restricting the amount of debt BADEJO Limited could raise. (7 Marks)

Answer

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Tags: Capital Investment, Debt Capacity, Debt Finance, Financing Mix, Long-Term Finance, Short-term Finance
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – May 2016 – L3 – Q3 – Financing Decisions and Capital Markets

Calculation of bond issue price, yield to maturity, and duration, and discussion of conflicts between shareholders and bondholders.

Question

(a)

Skylet Limited is a major player in the aviation industry with a credit rating of AA. The company plans to raise ₦5 billion from the bond market. The features of the bond are:

Maturity: 4 years
Coupon payment: Annual
Coupon rate: 5%
Redemption value: Par

The current annual spot yield curve for government bonds is as follows:

Term	Spot Rate
One-year	3.3%
Two-year	3.8%
Three-year	4.5%
Four-year	5.3%

The following table of spreads (in basis points) is given for the aviation industry:

Rating	1 Year	2 Year	3 Year	4 Year
AAA	12	23	36	50
AA	27	40	51	60
A	43	55	67	80

You are required to calculate:
i. The issue price of the bond. (6 Marks)
ii. The yield to maturity. (3 Marks)
iii. The duration. (6 Marks)

(b)

Discuss why conflicts of interest might exist between shareholders and bondholders. (5 Marks)

Answer

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Tags: Bond pricing, Credit Rating, Duration, Shareholder-Bondholder Conflict, Spot Rates, Yield to Maturity
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – May 2016 – L3 – Q2 – Financing Decisions and Capital Markets

Analysis of the impact of a rights issue on shareholder wealth, financial ratios, and evaluation of its appropriateness.

Question

(a)

(b)

Calculate the current earnings per share and the revised earnings per share if the proceeds of the rights issue are used to redeem some of the existing debentures. (4 Marks)

(c)

(d)

Answer

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Level: Level 3

Topic: Financing Decisions and Capital Markets

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

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

Topic: Financing Decisions and Capital Markets

FM – May 2017 – L3 – Q2 – Financing Decisions and Capital Markets

Calculate gearing ratio, rights issue impacts, and shareholder implications.

Question

LL Plc. is a large engineering company. Its ordinary shares are quoted on the Stock Exchange.

Funding Source	Total Par Value (₦m)	Market Value
Ordinary Share Capital (50k)	67.5	₦2.65/share ex-div
7% Preference Share Capital (₦1)	60.0	₦1.44/share ex-div
4% Redeemable Debentures (₦100)	45.0	90% ex-int

The Directors wish to assume that the income tax rate will be 21% for the foreseeable future and the tax will be payable in the same year as the cash flows to which it relates.

Required:
a. i. Calculate LL Plc.’s gearing ratio using both book and market values. (5 Marks)

ii. Discuss, with reference to relevant theories, why LL Plc.’s Board might have concerns over the level of gearing and its impact on LL Plc.’s market capitalisation. (6 Marks)

b. Assuming that a 1 for 9 rights issue goes ahead, calculate the theoretical ex-rights price of LL Plc.’s ordinary share and the value of a right. (3 Marks)

Answer

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Tags: Capital structure, EPS, Rights Issue, Share Price
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – Nov 2014 – L3 – SC – Q6b – Financing Decisions and Capital Markets

Examine reasons for conflict of interest between shareholders and bondholders.

Question

Discuss any FIVE reasons why conflict of interest may exist between shareholders and bondholders. (5 Marks)

Answer

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Tags: Bondholders, Conflict of Interest, Financing decisions, Governance, Risk Management, Shareholders
Level: Level 3

Topic: Financing Decisions and Capital Markets
Series: NOV 2014

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

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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 2021 – L3 – Q2 – Financing Decisions and Capital Markets

Evaluate financing options for Gap Plc, including rights issue and debt issue, using CAPM, market dynamics, and strategic implications.

Question

You should assume that the current date is 31 December 2019.
You work for Eko Corporate Finance (ECF). One of the clients for whom you are responsible is Gap Plc (GP).

Equity Issue:
The ₦560 million would be raised by a 1 for 2 rights issue, priced at a discount on the current market value of GP’s shares.

An extract from Gap Plc’s most recent management accounts is shown below:

₦m
Operating profit	200
Taxation at 20%	(40)
Profit after tax	160

Additional Information:

Gap Plc has an equity beta of 1.1
The risk-free rate is expected to be 3% p.a.
The market return is expected to be 8% p.a.
Gap Plc’s current share price is ₦5 per share ex-dividend.
Gap Plc has 320 million ordinary shares in issue.

Required:

a. Calculate, using the CAPM, Gap Plc’s cost of capital on 31 December 2019. (1 Mark)

Answer

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Tags: CAPM, Debt Financing, Gearing Ratio, Interest Cover, Rights Issue
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – May 2022 – L3 – Q2 – Financing Decisions and Capital Markets

Evaluate the financing options for Effe's expansion and provide advice on creditworthiness for a bond investment.

Question

Five-year unsecured bank loan at a fixed interest rate of 7% per annum;
Five-year unsecured bond with a coupon of 5% per annum, redeemable at par and issued at a 6% discount; and
A convertible bond, issued at par, with an annual coupon rate of 4.5% and a conversion option in five years’ time of five shares for each ₦100 nominal of debt.

There have been lengthy boardroom discussions on the relative merits of each instrument. Summarised below are the queries of three different directors concerning the instruments.

Required:

Answer

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Tags: Convertible Bonds, Credit Analysis, Debt Instruments, Equity Financing, Yield Calculations
Level: Level 3