Tetney plc and Habrough plc have both issued 5 million ordinary shares. In addition, Tetney plc has issued £500 000 of 11 percent convertible bonds, par value £100, convertible into 40 ordinary shares in five years’ time. If not converted, they will be redeemed at £105. Habrough plc has in issue 800 000 warrants, each with a subscription price of £2.50 for one ordinary share in Habrough plc. The warrants can be exercised in five years’ time.

(a) Describe the circumstances under which issuing convertible bonds or warrants would be advantageous to a company.

(b) Calculate the value of each convertible bond and each warrant in five years’ time, for the following situations: (i) the share price of both companies in five years’ time is £2; (ii) the share price of both companies in five years’ time is £3.

(c) For each situation, advise holders of the securities whether to exercise their respective conversion and/or warrant rights.

(d) Calculate the current market price of the convertible bond if the ordinary share price in five years’ time is either £2 or £3, using a cost of debt of eight per cent per year.

Answer rating: 100% (QA)

a Issuing convertible bonds or warrants would be advantageous to a company if the company wanted to ... View the full answer