Question

Mr Nikhil Yadav works as analyst at HSBC in Bangalore, HSBC has invested in Bhavya pharma that is proposing to come out with a new issue of preferred stock. Bhavya pharma had earlier issued one round of preferred stock couple of years ago. Mr Alok, CEO HSBC venture asked Nikhil to analyse the conversation value protection for the existing preferred stock (that were issued earlier by Bhavya pharma) in the context of the new issue. he has gathered the following.
.existing conversion price = rs 18
.hypothesised market price= rs 48 (this is the share value without new shares)
.new offering price =rs 15
.shares outstanding (before the new issue) =500,000 shares
.new shares =100,000 shares

calculate the new conversion prive using the (CPF) and market price formula (MPF). show your calculations.

Answer 1

Total shares = Number of outstanding shares + Number of new issue of shares

Total shares = 500000 + 100000

Total shares = 600000

Conversion price = [(Number of outstanding shares × Old conversion price) + (Number of new issue of shares × New issue price)]/Total shares

= [(500000*18) + (100000*15)]/600000

= 17.5

Market price = Old conversion price * (Number of outstanding shares + New issue price * Number. of new issue of shares/Share value without new shares)/Total Shares

= 18* (500000+15*100000/48)/600000

= 15.9375