Corning Inc., Zero Coupon Convertible Bonds

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Case: Corning Inc., Zero coupon convertible Bonds
Cornhill needs funds to the order of $ 3.6 billion in cash to complete the acquisition of Pirelli. The company currently is planning to come up with an equity issue to raise $ 2.1375 billion at $ 71.25 per share. The remaining part of the fund requirements is furbished using zero coupon convertible debentures due in 2015, priced at $ 741.923 per $ 1,000 principal amount. This offering price yields 2% p.a. compounded semi-annually. Corning is raising the requirement using a combination of debt and equity to preserve the Debt/capitalisation ratio for the company. Corning by using this strategy would preserve the current Debt/Capitalisation ratio and also expand it’s equity base on conversion enabling it to raise further debt. If Corning uses only debt mode of financing it’s Debt/Capitalisation increases to 44.06% and it could lower it’s credit rating leading to higher cost of debt. Also raising the entire amount using equity is not viable as Corning would lose on the tax savings that it gains using debt mode of financing and also raising the entire amount via equity would dilute the per share earnings of the company. This would not be viewed in positive light by the investors.

DebtEquityCapitalisationDebt/Capitalisation
Current2093.97852.29946.121.05%
Using proposed plan4106.49930.214036.629.25%
Using only Debt6184.47852.214036.644.06%
Using only Equity2093.911942.714036.614.92%
Value of the convertible bond.
The value of the convertible bond can be calculated by summing up its value broken up into the value of it as a straight bond and the various options associated with the convertible bond. VCB = VSB + VCO - VRO + VPO + VOMA

VCB = Value of the convertible option, VSB = Value as a straight bond, VCO = Value of convertible option, VRO = Value of redemption option, VPO = Value of put option, VOMA = Value of put in case of M&A Vsb319.6457

Vco564.2966
Vro284.98
Vpo166.25
Voma...
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