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The company’s leverage ratio is 28% - 72% of its assets are financed by common equity and the company was profitable in the last reporting period. The company should easily raise additional funds from creditors and a convertible debenture will be an appealing venture for creditors who would want to purchase stocks of the company in the future.

When the debt instrument and the option to acquire common stock are inseparable, as in the case of convertible bonds, the entire proceeds of the bond issue are allocated to the debt and the related premium or discount accounts.

o Cost of debt in this case is 12.5% though MCI can raise $ 100 million more with this option in comparison to option (a) above. Servicing this debt would be a significant drain on the cash flow. o Please see Exhibit 3. (c) $600 million Convertible offering @ 7.625% 20 year with conversion at 54 per share o Using this option MCI can raise $ 100 million more than option (b) at 4.88% lower rate of interest. It also gives MCI an option to convert it to equity once the stock price reaches 54 (it is currently 47). Based on previous convertible offerings (As per exhibit 6 of case, 1978, 1979, 1980, 1981 and 1982), MCI has been converting it to equity within 18 months because of its high growth. As higher growth is projected for the next few years (Exhibit 9 of case), MCI is expected to convert this $600 million offering to equity, thereby reducing its leverage. o This option allows to finance its current activities and match capital inflows with expected investment outlays in the near future. It also allows MCI the option to eliminate the cash flow drain from servicing the debt once the stock price increases. o As per Exhibit 3 attached here, this offering will provide capital to meet the external financing needs for 1983.

The issuance of convertible debt will result in even more cash holdings for Intel, an additional $1 billion. This, at face value, does not solve Intel’s capital structure dilemma of having too much cash. However, Intel can afford to incur more debt financing, since it has relatively low long-term debt. By doing so, its long term debt ratio (using 1991 figure) would change to:

An investment in a tax-exempt (municipal) bond with an interest rate of 8 percent is preferable to an investment in a taxable (corporate) bond with an interest rate of 10 percent.

• FAR Part 12 will not be used and a notice to perspective offerors that the Government does not intend to use Part 12 for the acquisition.

Even though these products are issued as long-term securities, they have many of the same features as traditional short-term ones. These debt products are both callable and puttable which gives the issuer as well as the investor flexibility. The call feature allows the issuer to buy back the bond. For issuers who are not sure how long they will need funds, they can get out of the agreement by calling the bond. Same goes for the investor; they can exercise the put option and receive their money back. In order to make these products more liquid, investment banks are used as remarketing agents. These agents resell the bonds at new rates to other investors. However, there is a cap on how high the rates on the bonds can be reissued at in order to limit the coupon payments. These variable rate debts also track the JJ Kenny index. The JJ Kenny index is an index similar to the S&P 500 but for municipal bonds. Also, a synthetic fixed rate debt can be created from combining a variable rate debt and a SWAP. Given the two proposals, the state is faced with three forms of debt. The first form is a fixed rate option that would provide the state with 20 year serial issued bonds with fixed

The costs of issuing the financing, and The fact that interest payments are deductible for tax purposes.

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

There are two main characteristics of the Series B Preferred Stock that behave like equity- the voting rights and conversion option. The host contract gives voting rights- which behave like equity. While voting rights fall into the equity category, these are not full voting rights. The voting rights allow the Series B preferred stockholders to vote with common stockholders only for significant events. These voting rights are therefore not full voting rights which means this characteristic is not given its full weight as being toward equity. The conversion option shows signs of equity; however, it also shows signs of debt. Since the conversion option is weighted equally for equity and debt, it essentially cancels itself in determining whether the host contract is debt or equity.

liabilities, for example. They may also wish to swap a fixed coupon asset in order to reduce the interest rate risk associated with it or to ensure it better matches liabilities expected to be linked to market interest rates. Similarly, a borrower may issue a fixed coupon bond for demand reasons, but prefer floating liabilities. This is common, for example with financials.

WorldCom has the option to extend its bank loan credit facility or to issue this large $6 billion in debt. It plans to use the rolling commercial paper program to pay British Telecommunications for MCI’s share purchases, and then use bond proceeds to pay off the commercial paper program. This signals that WorldCom does not need the money immediately for a single corporate purpose, and does not need the money immediately. Therefore, perhaps it makes sense for WorldCom to issue the bonds in smaller installments rather than flooding the market with $6 billion in debt all at once. The first reason for this is that, if an underwriter must first purchase the bonds before selling to investors, an underwriter may demand greater spread in order to justify taking down an entire $6 billion in debt using the bank’s capital assets. The second

•Yan, A., Nandy, D., and Chemmanur, T. "Why issue mandatory convertibles? Theory and empirical evidence, February (2003) Retrieved on 18.3.2008 (http://ideas.repec.org/p/ecm/nawm04/456.html)•http://www.investorwords.com/5362/yield.html. 18/3/2008.

Also, the stock market tends to react negatively to announcements of new common stock offerings, whereas debt security announcement tend to have little impact on stock prices. As a additional external financing is needed, the firm will work down the pecking order – from safe to more risky debt, then possibly to convertible debt, and finally to common equity as a last resort.

ii) Transfer: An investor is entitled to get the unit of shares certificates transferred with a period of 30 days from the date of lodgment of the offer.