- 15 Marks
FM – L2 – Q16 – Sources of finance: debt
Question
Amoah Plc and Bonsu Plc each have in issue 2,000,000 ordinary shares of GH₵1 nominal value.
Amoah Plc also has GH₵2,500,000 of 12% convertible debentures in issue. Each GH₵100 of bonds is convertible into 20 ordinary shares at any time until the date of expiry of the bonds. If the bonds have not been converted by the expiry date, they will be redeemed at 105.
Bonsu Plc has 500,000 equity warrants in issue. Each warrant gives its holder an option to subscribe for 1 ordinary share at a price of GH₵5.00 per share. The warrants can be exercised at any time until the date of their expiry.
The shares of both companies, the convertible debentures, and the warrants are all actively traded in the stock market.
Required
(a) Calculate the value of each GH₵100 unit of convertible debentures of Amoah Plc and the value of each warrant of Bonsu Plc on the day of expiry, if the share price for each company at that date is:
(i) GH₵4.40
(ii) GH₵5.20
(iii) GH₵6.00
(iv) GH₵6.80
(b) Assume that the profit before interest and tax of both companies is GH₵1,200,000 and the rate of tax is 50%.
Calculate the earnings per share for:
(i) Amoah Plc, assuming that none of the convertible debentures are converted
(ii) Amoah Plc, assuming that all of the convertible debentures are converted
(iii) Bonsu Plc, assuming that none of the warrants are exercised
(iv) Bonsu Plc, assuming that all of the warrants are exercised
Answer
(a) Convertibles
| Value of equity if converted per GH₵100 of bonds (20 shares) | Value as debt if not converted | Value of converted convertibles |
|---|---|---|
| GH₵4.40 × 20 = GH₵88 | GH₵105 | GH₵105 |
| GH₵5.20 × 20 = GH₵104 | GH₵105 | GH₵105 |
| GH₵6.00 × 20 = GH₵120 | GH₵105 | GH₵120 |
| GH₵6.80 × 20 = GH₵136 | GH₵105 | GH₵136 |
Warrants
| Share price | Exercise price | Value of warrant |
|---|---|---|
| GH₵4.40 | GH₵5 | GH₵0 |
| GH₵5.20 | GH₵5 | GH₵0.20 |
| GH₵6.00 | GH₵5 | GH₵1.00 |
| GH₵6.80 | GH₵5 | GH₵1.80 |
(b) Convertibles (Amoah Plc)
| Item | No conversion | All converted |
|---|---|---|
| Profit before interest (GH₵) | 1,200,000 | 1,200,000 |
| Interest (GH₵2.5m × 12%) | (300,000) | 0 |
| Profit before tax | 900,000 | 1,200,000 |
| Tax at 50% | (450,000) | (600,000) |
| Earnings (profit after tax) | 450,000 | 600,000 |
| Number of shares | 2,000,000 | 3,500,000 |
| Earnings per share (GH₵) | 0.225 | 0.171 |
Warrants (Bonsu Plc)
| Item | Before exercise | After exercise |
|---|---|---|
| Profit before interest (GH₵) | 1,200,000 | 1,200,000 |
| Plus return on additional funds raised: 10% × GH₵2,500,000 | 0 | 250,000 |
| Profit before tax | 1,200,000 | 1,450,000 |
| Tax at 50% | (600,000) | (725,000) |
| Earnings (profit after tax) | 600,000 | 725,000 |
| Number of shares | 2,000,000 | 2,500,000 |
| Earnings per share (GH₵) | 0.30 | 0.29 |
- Topic: Sources of finance: debt
- Uploader: Samuel Duah