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)
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?
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…show more content… Therefore, although the possible upside gains on the convertible security is higher than a normal security; its default risk is also relatively higher.
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?
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)
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%,