Mogen Inc

8573 WordsJun 15, 201335 Pages
MOGEN, INC. Teaching Note Synopsis and Objectives In 2006, Merrill Lynch became the lead book runner for a $5 billion convertible bond issue for MoGen, Inc. This was the single, largest convertible bond issuance in history and required a considerable amount of effort on the part of Merrill Lynch’s Equity Derivatives Group to convince MoGen’s management to choose Merrill Lynch over its competitors. The case is focused on Merrill Lynch’s choice of the conversion premium and coupon rate to propose to MoGen management. This pricing decision requires students understand the concept of valuing a convertible as the sum of a straight bond plus the conversion option. Valuing the conversion option as a call option requires the…show more content…
2. How would you describe MoGen’s financing strategy? (10 minutes) Students should see that the risks of the biotech business are driving all of MoGen’s financial decisions: debt policy, dividend policy, and share repurchase program. Debt is relatively low because higher debt levels would result in debt rating decreases and therefore higher interest rates. Similarly, the company chooses to pay no dividends because of the risk of being forced to cut the dividend during the difficult times that invariably arise in a biotech business. Students should realize that a share repurchase program is a very good match for a biotech company like MoGen. The company can distribute cash to its shareholders when profits allow, but without making an explicit (debt) or implicit (dividends) promise to the market. 3. What are MoGen’s uses of funds for 2006? How important is the share repurchase program to MoGen’s choice to issue a convertible bond? (10 minutes) This question is designed to focus the class on the share repurchase program as a critical use of funds for 2006. The primary advantage of share repurchases using dividends is that management can turn share repurchases off and on as allowed by cash flow. The other projected uses of funds, however, are largely driven by business issues that are not as flexible for management. Students should notice that

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