1433 others answered this question

Question 2a

Recent information on the earnings per share and share price of Par Co is as follows:
Year 2011 2012 2013 2014
Earnings per share (cents) 64 68 70 62
Year-end share price ($) 9·15 9·88 10·49 10·90
Par Co currently has the following long-term capital structure:
$m $m
Equity finance
Ordinary shares 30·0
Reserves 38·4
68·4
Non-current liabilities
Bank loans 15·0
8% convertible loan notes 40·0
55·0
Total equity and liabilities 123·4

The 8% loan notes are convertible into eight ordinary shares per loan note in seven years’ time. If not converted, the loan notes can be redeemed on the same future date at their nominal value of $100. Par Co has a cost of debt of 9% per year.

The ordinary shares of Par Co have a nominal value of $1 per share and have been traded on a large stock exchange for many years. Listed companies similar to Par Co have been recently reported to have an average price/earnings ratio of 12 times.

Required:
(a) Calculate the market price of the convertible loan notes of Par Co, commenting on whether conversion is likely. (5 marks)

We use cookies to help make our website better. We'll assume you're OK with this if you continue. You can change your Cookie Settings any time.

Cookie SettingsAccept