FINA 495-Week 7 Textbook Exercises Fall 2015 Convertibles and Share Repurchases
ID: 2776098 • Letter: F
Question
FINA 495-Week 7 Textbook Exercises Fall 2015
Convertibles and Share Repurchases
Convertibles
Assume the following:
Loan amount (USD ‘000,000)
50
LIBOR
3%
Premium (spread) over LIBOR
1%
All-in interest rate
4%
Today’s share price
$2.00
Term (years)
10
Conversion price
$4.00
Number of shares on conversion (‘000,000)
25
Complete the following table. For “Overall Compound ROI or IRR” utilize all 10 years of cash flows, including initial loan outflow, annual interest payments received on the loan in years 1 through 10, and the values of shares in Year 10.
Annual growth in share price
Share price in Year 10
Value of shares (‘000,000)
Overall Compound ROI or IRR
8%
9%
10%
11%
12%
13%
14%
15%
If an investor anticipates growth in the share price of 10% per annum, and requires a 14% return should s/he invest in the convertible? Explain.
Share Repurchases
Assume the following:
Shares outstanding
400 million
Current share price
$4.00
Current P/E multiple
17.6
Normal dividend pay-out
50%
Cash to be dividended or used for share buy-back
200 million
Determine the impact of both a cash dividend and share repurchase on earnings per share by completing the empty cells in the table below.
(‘000,000)
Latest P&L
Impact of Cash Dividend
Impact of Share buy-back
Operating profit (EBIT)
150
150
150
Interest income
10
0
0
Profit before tax
140
Taxation
49
Profit after tax
91
Dividends paid
45.5
Retained profits
45.5
Earnings per share
0.2275
No. of shares
400
Loan amount (USD ‘000,000)
50
LIBOR
3%
Premium (spread) over LIBOR
1%
All-in interest rate
4%
Today’s share price
$2.00
Term (years)
10
Conversion price
$4.00
Number of shares on conversion (‘000,000)
25
Explanation / Answer
Answer for first Part:
Share Value $2 Interest @4% in 10 years = 2 x 1.04^10-2=0.96 Share price Value of Overall Annual Growth in 10 years Shares ROI 8% 4.3178 107946250 6.79% 9.00% 4.7347 118368184 8.87% 10.00% 5.1875 129687123 11.14% 11.00% 5.6788 141971049 13.59% 12.00% 6.2117 155292410 16.26% 13.00% 6.7891 169728369 19.15% 14.00% 7.4144 185361066 22.27% 15.00% 8.0911 202277887 25.66% Selling Price in 10 years(p) = 2 x (1+r/100)^10 Value of Shares = 50,000,000 x (1+r/100)^10 Overall Return = ((p - 2-0.96)/10)/2Related Questions
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