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TMA 1 - Assignment 1 for FIN B386F Note 1 Write down your...

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Assignment 1 for FIN B386F Note: 1. Write down your tutor name and tutorial class on the coversheet of your assignment. 2. Submit your assignment to the collection box at the Full-Time office (Floor 8, Block A, OUHK Campus) of School of Business and Administration before 5:00 pm on 25 Feb 2011 . Any late submissions will be given a penalty on the final grading. 3. Weighting: 15% of the total marks for the course Question 1 (20 marks) Prospect Corporation is a venture capital company. It was incorporated and listed on the Growth Enterprise Market (GEM) four years ago. Since incorporation, the company has been rather successful and its shares are currently trading at $4.5 per share. Apart from ordinary shares, Prospect has issued 8% convertible bond, redeemable in 2020. The face value of the convertible bond is $1,000, with coupons payable semi-annually and a conversion price of $5. Conversion may take place at any time over the next two years. Current market price of Prospect’s convertible bond is $950. Yield to maturity of coupon bonds of a similar risk profile is 10%. Assume now is the end of 2010 and bond interest has already been paid. The board of directors expect Prospect’s share price to rise at 12% per year. No dividend is anticipated for coming two years. (a) As a holder of Prospect’s convertible bond, which of the following actions would you choose to maximize the value of your investment? Explain your decision with a comparison of payoff from each action. (i) Hold the bond until maturity (ii) Sell the bond immediately (iii) Convert the bond to shares now 1
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(iv) Convert the bond at the end of second year. (10 marks) (b) Explain the differences in payoffs from actions (i), (ii) and (iii). (4 marks) (c) What are the factors to be considered when using convertible bond as a way of raising finance? (6 marks) Question 2 (20 marks)
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