Question

Question 5

(a) HSU has announced a rights offer to issue 2,000,000 new shares at a $11 subscription price. There are 5,000,000 shares outstanding trading at $12 each. Calculate the ex-rights price and the value of a right. (Show your calculations).

(b) HSU issued an annual coupon convertible bond with a coupon rate of 10% and a face value of $1,000. The bond will mature 2 years from today. The annual market interest rate is 10%. The conversion ratio is 40 shares. The current stock price is $35 per share.

(i) Calculate the option value of the bond if each convertible bond is trading at $1,520. (Show your calculations).

(ii) Explain the meaning of your answer in part (i) above.

Answer 1

a. No of rights per shares outstanding = 2,000,000/ 5,000,000 = 0.4 rights

Ex rights price = ( 2,000,000*11) + ( 5,000,000*12) / ( 5,000,000+ 2,000,000) = $11.71

Value of one right stock trading ex right = 11. 71 - 11 / 0.4 = 1.79

b.(i) Conversion value = Stock price * Conversion ratio = $40 *35 = $1400

(ii) There is a conversion premium i.e. the market value of the bonds are selling above their conversion value.

Conversion premium= ( 1520-1400)/ 1400 = 8.57%