KIKO Bhd. issued RM50 million of 5% bonds which are redeemable at their par valu

Question

KIKO Bhd. issued RM50 million of 5% bonds which are redeemable at their par value of RM100 in 7 years’ time. Alternatively, each bond can be converted into 20 ordinary shares of the company within the next 5 years. The share price of KIKO is RM6 after 5 years. The company’s cost of debt is 3% per annum.

Analyse:

(i) The market value for each RM100 convertible bond if conversion is likely to take place.

(ii) The floor value for each RM100 convertible bond.

(iii) The number of additional shares will KIKO need to issue if the bondholders do convert the bonds.

(7 marks)

Explanation / Answer

(i) Market value/Conversion value = equity value or stock value of the convertible

equity value or stock value of the convertible= stock price x conversion ratio = RM6 x 20 = RM120

(ii)Fair value of bond =

Total

Fair Value of each convertible bond = 100.43

PVAF = {[1/(1+r)n] -1 } / r

PVAF = {[1/(1+0.03)5] -1 } / 0.03

PVAF = 2.8286

PVF = (1/(1+r))n

(iii) No of additional shares to be issued = conversion ratio * no of bonds to be converted

  No of additional shares to be issued = 20 * RM50 million

No of additional shares to be issued =RM100 million

Year Cashflow PVF @ 3% PV 1-5 5 2.8286 (PVAF) 14.143 5 100 0.8626(PVF) 86.26

Total

100.403

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