At 31 January 2012 Waterloo plc and Templemead plc both have in issue 12 million ordinary shares. In addition, Waterloo plc has in issue £1,600,000 of convertible debentures, carrying an annual coupon rate of 11 per cent with the option to convert into 30 ordinary shares on 31 January 2017. Templemead plc has in issue 2 million warrants, each with a subscription price of £4 for one ordinary share in Templemead plc. The warrant can be exercised on 31 January 2017 if beneficial to do so. The redemption price of the convertible debentures is £112.

(a)      Calculate the value of each convertible debenture and each warrant on 30 January 2017, for the following situations:

           (i)     the share price of both companies is £3.00

           (ii)    the share price of both companies is £5.00

           For each situation, advise holders of the securities whether to exercise their respective conversion and/or warrant rights.

                                                                                                                                  (12 marks)

(b)      Estimate what the market price should have been on 31 January 2012 for each convertible debenture if the ordinary share price forecast for 31January 2017 was either £3.00 or £5.00, given the yield on ordinary debentures with equivalent risk to Waterloo plc was eight per cent per annum.

                                                                                                                                  (10 marks)

(c)      Explain under what circumstances you would advise a company to issue convertible debentures or warrants.