Question #1.Many businesses issue loan notes, which carry the right for holders to convert them into ordinary shares in the same business at a later date. Why might a business choose to issue convertible loan notes rather than make an issue of equity in the first place?Most businesses, particularly larger ones, have outstanding claims (financial obligations) of a wide variety of types from a wide variety of claimants at any given moment. Why is there this diversity?Polecat plc has 18 million $0.50 ordinary shares in issue. The current stock market value of these is $1.70 per share. The directors have decided to make a one-for-three rights issue at $1.25 each. Julie owns 3,000 Polecat ordinary shares. Assuming that the rights issue will be the only influence on the share price: (a) What, in theory, will be the ex-rights price of the shares (that is, the price of the shares once the rights issue has taken place)? (b) For how much, in theory, could Julie sell the ‘right’ to buy one share? (c) Will it matter to Julie if she allows the rights to lapse (that is, she does nothing)?

Convertible loan notes are financial instruments that start as debt but can be converted into equity…

Answered: Question #1. Many businesses issue…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 3MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing....

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Question #1.

Many businesses issue loan notes, which carry the right for holders to convert them into ordinary shares in the same business at a later date. Why might a business choose to issue convertible loan notes rather than make an issue of equity in the first place?
Most businesses, particularly larger ones, have outstanding claims (financial obligations) of a wide variety of types from a wide variety of claimants at any given moment. Why is there this diversity?
Polecat plc has 18 million $0.50 ordinary shares in issue. The current stock market value of these is $1.70 per share. The directors have decided to make a one-for-three rights issue at $1.25 each. Julie owns 3,000 Polecat ordinary shares. Assuming that the rights issue will be the only influence on the share price: (a) What, in theory, will be the ex-rights price of the shares (that is, the price of the shares once the rights issue has taken place)? (b) For how much, in theory, could Julie sell the ‘right’ to buy one share? (c) Will it matter to Julie if she allows the rights to lapse (that is, she does nothing)?

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