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Running Head: MAPLE AIRCRAFT CASE STUDY

Maple Aircraft Case Study

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Part A

Yield to maturity is defined as the total amount of money that one will gain from a bond that they have held since they bought it to its maturity and majorly applies the return from a bond in the long run (Liu, 2020). The formula YTM=√ (Face value / Current price) −1 is used (Parameswaran, 2019).

Where:

YMT is an abbreviation of Yield to Maturity

Calculations:

Face value = Maturity value

n = number of years that he bond take to mature

n = 3

Current price of a bond = the price at which the bond is being sold currently.

Hence:

YTM=√ (Face value / 0.0522) −1

YTM = 0.0826

Part B

Debentures convertible ratio is defined as the number of shares you can get from one debenture if appropriated to share denominations. This conversion must be made in denominations of one hundred ordinary shares, which a debenture can be converted to.

The following formula is used to calculate the bond conversion ratio into shares (Wang & Qin, 2017, November).

The ratio of debentures conversion = (Face value of a bond / Price of conversion) – 1

From the figures provided in question:

Ration of debentures conversion = ($1000 / $47) – 1

Ration of debentures conversion = 20.28

Part C

To calculate the conversion price when the ratio is shifted to $50, the following formula is used (O’Neal, 2018).

The ratio of debentures conversion = (Face value of a bond / Price of conversion) – 1

By replacing $50 accordingly, the conversion pre is as follows:

Ration of debentures conversion = ($1000 / $50) - 1

Ration of debentures conversion = 19

Part D

In any given instance, when convertible securities are converted to be common stock and the resultant amount is given to the investor, this gives rise to a value called the conversion value paid to the investor (Gniadkowska-Szymańska, 2021). Investors use the conversion value to determine how long they should be in possession of a convertible security. Here, the investor holds such convertible security and waits in the future till such security appreciates enough. The investor can now accept the convertible security resultant face value it is converted to common stock.

The conversion security has been calculated above. An investor wait when conversion security attracts a good amount that the investor is willing to earn after they have held conversion security for quite some time in the long run.

The formula to calculate conversion value is given by from division of conversion ratio by the stock price.

From the above calculations, the ratio of conversion is 20.28.

Hence, conversion value = 20.28 / 41.50

Conversion value = 0.4887

Part E

There is a point where the stock price equates to the conversion value and hence equilibrium between the two. To obtain the value, you have to dive into the given convertible stock market price if it was never converted by the ratio to convert debenture. The results are as follow:

650 / 20.28

32.05

Part F

It is impossible to have convertible securities' conversion value higher than their market price (Ammann, Blickle & Ehmann, 2017). If the conversion value is higher than the market value, then it is not attractive enough to invest in it. The nature of conversion securities should gain value in the future and appreciate when they will be converted into commons shares. Therefore, if the convertible security is higher than the market value, then it has no return that it guarantees to investors. To make it attractive and meaningful t investors, it must have a lower value than the market price.

Part G

The value of conversion option per share (Gornall & Strebulaev, 2020) is calculated as follows:

(Market price of a bond – value if no conversion) / ratio of conversion

= (910 – 650) / 20.28

= 12.82

Part H

For conversion to be justified in three years, then:

(Price of conversion/stock price) – 1

(47/41.5) – 1 = 0.13

This implies that if the common shares have risen by 0.13 times, they will have attained value to be converted. Therefore, an investor should consider if common will have gained the amount of price they are willing to take profits at. This is to make it easy for them to gain the most after a certain time of holding commons. For the above common, if the rise is below 0.13, then it is not attractive enough for investors to risk their money (Correia & Meneses, 2017). 

REFERENCES:

Gniadkowska-Szymańska, A. (2021). Liquidity of assets and liquidity of shares: the example of the Warsaw Stock Exchange. Bank I Kredyt, 52(1), 1-22.

Gornall, W., & Strebulaev, I. A. (2020). Squaring venture capital valuations with reality. Journal of Financial Economics, 135(1), 120-143.

O’Neal, M. (2018). 8. SECURITIES. In Banking and financial English (pp. 89-104). Oldenbourg Wissenschaftsverlag.

Liu, Z. (2020). Financial Valuation of a Chosen Company for IPO Purpose.

Ammann, M., Blickle, K., & Ehmann, C. (2017). Announcement effects of contingent convertible securities: Evidence from the global banking industry. European financial management, 23(1), 127-152.

Wang, W., & Qin, X. (2017, November). A Kind of Investor-Friendly Dual-Trigger Contingent Convertible Bond. In International Symposium on Knowledge and Systems Sciences (pp. 242-249). Springer, Singapore.

Correia, M. R., & Meneses, R. F. C. (2017). Venture Capital and the Use of Convertible Securities and Control Rights Covenants: A Fuzzy Set Approach (No. 44).

Parameswaran, S. K. (2019). Bonds: Advanced Concepts. In Fixed Income Securities (pp. 65-96). De Gruyter.