Ril Case Study Tocd

1154 Words Aug 26th, 2011 5 Pages
Financial Management (Case Study-1)
Reliance Industries Limited
Triple Option Convertible Debentures

Submitted By: Group-8: Abhishek Kumar (BLP038) Aparna Chowdhry (BLP040) Maninder Bisen (BLP042) Vivek Kumar (BLP044) Manjesh Bharati (BLP046) Raman Girdhar (BLP048)

Question-1:
Discuss in detail the benefits of convertible securities for the issuing company as well as the investors. Briefly discuss the potential drawback of convertible securities for both?
Ans-1
Benefits to Issuer: * Companies have incentive to raise convertible debt, rather than traditional debt, because the interest payments on convertible securities are usually lower, thus
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Therefore, although the possible upside gains on the convertible security is higher than a normal security; its default risk is also relatively higher.

Question 2.

Evaluate the three initial options provided to the RPL TOCD holders on the basis of yield to maturity. Assume that a TOCD holder sold the RPL shares and each warrant (in the case of Option I) issued in September 1993 are Rs. 22 and Rs. 5 respectively in September 1997. Calculate the YTM on the basis of number of years completed?

Ans 2.

Given:

Rs 20.00 | Zero Date- (taken as Opening Date) | Rs 10.00 | After 18 Months | Rs 15.00 | After 30 Months | Rs 15.00 | After 36 Months | Non Convertible Bonds @ Rs40 6th Yr. | Rs 20.00 | 7th Yr. | Rs 30.00 | 8th Yr. | Rs 30.00 |

2 warrants @ Rs. 10, Premium over Face Value Rs. 10

Bonds | Warrants | Option 1Retain | Sell * | Option 2Surrender | Surrender | Option 3Retain | Convert |

*Warrants can be sold @ Rs. 5 in Sept’ 97 Share Price = Rs. 22/- as on Sept' 97

| Option 1 | Option 2 | Option 3 | Out Flow | Rs. 60 | Rs. 60 | Rs. 60 + 40 | In Flow | Rs. (44 + 80 + 10) | Rs. (44 + 44) | Rs. (80 + 44 + 44) |

Inflow = Outflow (At Zero ‘th Year i.e. In 1993)

Option 1:

20 + 10 x PVIF (r%, 1.5) + 15 x PVIF (r%, 2.5) + 15 x PVIF (r%, 3) = 44 x PVIF (r%, 4) + 20 x PVIF (r%,

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