Hi, Can anyone help me figure out what's going on here please? Q1 Shares in PDQ plc are trading in the market at 110p. The company also has an issue of convertible loan stock, currently trading at £105 (per £100 nominal). Conversion terms are £5 nominal of stock converts to 4 ordinary shares on any 1 July after 2005. What is the effective conversion price? A1 The effective conversion price is the price an investor effectively pays for the shares by buying them via the convertible. In this example, it is 105 x 5 / 4 = 131.25p. -------------------------------------------------------------------------- Q2 The market price of a convertible loan stock is £90 per £100 nominal. Each 100 convertible convert into 35 ordinary shares. The market price of the equity shares is currently £2.40 and the market price of a similar loan stock which does not hold the right to convert into equity is £85 per £100 nominal. What is the conversion premium of the convertible loan stock? A2 £0.17 Explanation The conversion premium is equal to the difference between: 1. effective cost of the equity shares if an investor were to buy and convert the convertible loan stock, and 2. the market price of the equity shares themselves. ie £90/35 less £2.40 = £0.17 The loan stock without the right to convert is of no use for this question. -------------------------------------------------------------------------- In Q1 is the '£5 nominal of stoick converts to 4 ordinary shares' the equivalent of saying 'Each 4.76 convertible converts into 4 ordinary shares'? Also, does the 'Each 100 convertible' in Q2 strictly mean '£100 of nominal loan stock'? i.e if it said 50 convertible would we use £45/35=£1.29 as the effective cost of ordinary shares if the convertible loan stock had been bought and converted? i.e. are the 4.76 and £5 in Q1 and the 100 and £90 in Q2 interchangeable? i.e. 4.76% of the current loan stock market value = £5 (Q1) and 100% of the current loan stock market value = £90 (Q2)? Any advice to clear this up would be much appreciated!! (especially if Margaret is about??? ;-) ) Cheers
Hi I'd say the answer to your questions is "yes", ie your explanation of this looks good to me Yes, in Q1 the '£5 nominal of stock converts to 4 ordinary shares' is equivalent to 'Each 4.76 convertible converts into 4 ordinary shares'. In Q2 'Each 100 convertible' does strictly mean '£100 of nominal loan stock'. It's usual to express the conversion terms as number of shares per £ nominal of the loan stock as this means the terms are fixed and don't vary with movements in the MV of the loan stock. So, yes, the 4.76/5 in Q1 are equivalent to the 100/90 in Q2. Hope this helps? Best of luck with the revision and the exam Lynn
