Problem:
Assume the following:
|
Loan amount (USD Ac000,000)
|
50
|
|
LIBOR
|
3%
|
|
Premium (spread) over LIBOR
|
1%
|
|
All-in interest rate
|
4%
|
|
TodayAccs share price
|
$2.00
|
|
Term (years)
|
10
|
|
Conversion price
|
$4.00
|
|
Number of shares on conversion (Ac000,000)
|
25
|
Complete the following table. For AcA Overall Compound ROI or IRRAc? utilize all 10 years of cash flows, including initial loan outflow, annual interest payments received on the loan in years 1 through 10, and the values of shares in Year 10.
|
Annual growth in share price
|
Share price in Year 10
|
Value of shares (Ac000,000)
|
Overall Compound ROI or IRR
|
|
8%
|
|
|
|
|
9%
|
|
|
|
|
10%
|
|
|
|
|
11%
|
|
|
|
|
12%
|
|
|
|
|
13%
|
|
|
|
|
14%
|
|
|
|
|
15%
|
|
|
|
If an investor anticipates growth in the share price of 10% per annum, and requires a 14% return should s/he invest in the convertible? Explain.
Share Repurchases
Assume the following:
|
Shares outstanding
|
400 million
|
|
Current share price
|
$4.00
|
|
Current P/E multiple
|
17.6
|
|
Normal dividend pay-out
|
50%
|
|
Cash to be dividended or used for share buy-back
|
200 million
|
Determine the impact of both a cash dividend and share repurchase on earnings per share by completing the empty cells in the table below.
|
(Ac000,000)
|
Latest P&L
|
Impact of Cash Dividend
|
Impact of Share buy-back
|
|
Operating profit (EBIT)
|
150
|
150
|
150
|
|
Interest income
|
10
|
0
|
0
|
|
Profit before tax
|
140
|
|
|
|
Taxation
|
49
|
|
|
|
Profit after tax
|
91
|
|
|
|
Dividends paid
|
45.5
|
|
|
|
Retained profits
|
45.5
|
|
|
|
Earnings per share
|
0.2275
|
|
|
|
No. of shares
|
400
|
|
|