Assume the following:

Loan amount (USD 000,000)	50
LIBOR	3%
Premium (spread) over LIBOR	1%
All-in interest rate	4%
Today’s share price	$2.00
Term (years)	10
Conversion price	$4.00
Number of shares on conversion (‘000,000)	25

Complete the following table. For “Overall Compound ROI or IRR” utilize all 10 years of cash flows, including initial loan outflow, annual interest payments received on the loan in years 1 through 10, and the values of shares in Year 10.

Annual growth in share price	Share price in Year 10	Value of shares (‘000,000)	Overall Compound ROI or IRR
8%
9%
10%
11%
12%
13%
14%
15%

If an investor anticipates growth in the share price of 10% per annum and requires a 14% return should s/he invest in the convertible? Explain.

Share Repurchases

Assume the following:

Shares outstanding	400 million
Current share price	$4.00
Current P/E multiple	17.6
Normal dividend pay-out	50%
Cash to be divided or used for share buy-back	200 million

Determine the impact of both a cash dividend and share repurchase on earnings per share by completing the empty cells in the table below.

(‘000,000)	Latest P&L	Impact of Cash Dividend	Impact of Share buy-back
Operating profit (EBIT)	150	150	150
Interest income	10	0	0
Profit before tax	140
Taxation	49
Profit after tax	91
Dividends paid	45.5
Retained profits	45.5
Earnings per share	0.2275
No. of shares	400