1.
The formula for the theoretical ex-rights price is as follows
No. shares held cum-rights X cum-rights share price + No. rights allocated X
right issue price
Total no. shares held assuming rights exercised
2. Nil-paid value= Theoretical ex-right price- Issue price
3. The number of nil-paid rights to be sold to take up the balance at nil cost is
given by the equation:
Issue price of new shares x number of shares allocated
Theoretical ex-rights price
4. Conversion Premium=
Market Price of Convertible Security−Conversion Value X100
conversion value
Where:
Market Price of Convertible Security: This is the current price at which
the convertible bond or preferred stock is trading in the market.
Conversion Value: This is the value of the stock if the convertible security
were to be converted into stock. You can calculate this by multiplying the
number of shares that the bond can be converted into by the current stock
price.
1
Exercise 1
a. Calculate the flat yield on a 4% gilt, redeeming in eight years and priced at
£98.90.
b. Calculate the flat yield on a 7% gilt, redeeming in three years and priced at
£108.60.
The answer to this exercise can be found at the end of this chapter
Exercise 1
a. Calculate the flat yield on a 4% gilt, redeeming in eight years and priced at
￡98.90.
(4 / 98.90) x 100 = 4.04%
b. Calculate the flat yield on a 7% gilt, redeeming in three years and priced at
￡108.60.
(7 / 108.60) x 100 = 6.45%
Exercise 2
The convertible bonds issued by ABC plc are trading at £110. Each £100 nominal
value offers the
holder the option of converting into 15 ordinary ABC shares. The ordinary shares
of ABC are currently
trading at £6.40. What is the conversion premium, expressed in percentage terms?
The answer to this exercise can be found at the end of this chapter
Exercise 2
The share value of the conversion choice is currently 15 x ￡6.40 = ￡96.
The bond is trading at ￡110, so the premium is ￡14 per ￡100 nominal value.
Expressed as a percentage:
2
14/96 x 100 = 14.6%.
Exercise 3
What is the price of the same two-year 10% coupon-paying bond if interest rates
are:
a. 6%?
b. 4%
The answer to this exercise can be found at the end of this chapter
Exercise 3
Time Cash flow Discount factor Present value
End of year one $100 1/1.06 94.33
End of year two $1,100 1/1.062 978.99
Sum of the individual present values = price of the bond $1,073.33
Time Cash flow Discount factor Present value
End of year one $100 1/1.04 96.15
End of year two $1,100 1/1.042 1,017. 01
Sum of the individual present values = price of the bond $1,113.16
Chapter6
Exercise 1
a. A company has a 1-for-1 bonus issue. What is the ex-bonus price (the price after
the issue) if the
cum-bonus price (the price before the issue) is $10? Here
Exercise 1
a. Bonus issue
Number of shares Price per share Total value of holding
3
Before 1 $10.00 $10.00
Bonus 1 $0.00 $0.00
After 2 $10 / 2 = $5 $10.00
The theoretical ex-bonus price would be $5.
b. Share split
If the shares were split into two, the impact would be the same. The price after the
split would be half
of the price before = $10 / 2 = $5.
c. Reverse share split
If there was a reverse share split, and five original shares become one new share,
the per share price
would rise. The new shares will theoretically be worth five times the previous
value: 5 x $10 = $50.
Exercise 2
A company’s shares are currently trading at $5.00 each. The company announces a
1-for-3 rights issue
at $3.00 per share. What is the theoretical ex-rights price?
Exercise 2
Number of shares Price per share Total value of holding
Before 3 $5.00 $15.00
Bonus 1 $3.00 $3.00
After 4 $18.00 / 4 = $4.50 $18.00
The theoretical ex-rights price is $18.00 divided by 4 = $4.50.
Exercise 3
4
A company’s shares are currently trading at $8.00 each. The company announces a
1-for-6 rights issue
at $4.50 per share. What is the nil-paid value?
Exercise 4
A company’s shares are currently trading at $5.00 each. The company announces a
1 for 3 rights issue
at $3.00 per share. For a shareholder with 3,000 shares, how many shares should
be sold nil-paid to
‘swallow the tail’?
Exercise 3
Number of shares Price per share Total value of holding
Before 6 $8.00 $48.00
Bonus 1 $4.50 $4.50
After 7 $52.50 / 7 = $7.50 $52.50
The nil-paid value is the theoretical ex-rights price of $7.50 less the rights price of
$4.50 = $3.00.
Exercise 4
Number of shares Price per share Total value of holding
Before 3 $5.00 $15.00
Bonus 1 $3.00 $3.00
After 4 $18.00 / 4 = $4.50 $18.00
The theoretical ex-rights price is $18.00 divided by 4 = $4.50.
The number of shares to be sold is given by:
(Issue price of new shares x number of shares allocated)/theoretical ex-rights price
=
3 x 1000/4.50 = 666.67.
5
Rounded up to 667 shares sold at the nil-paid value of (4.50-3.00) = 1.50 generates
$1,000.50.
That would leave 333 shares to be taken up that will cost 333 x $3 = $999.
The shareholder will be left with an additional $1.50 ($1,000.50 – $999.00).