Aside from the bond issue Swanco plans an issue of Redeemable Preference Shares (‘RPS’). The RPS provide for a fixed cumulative annual dividend of 8% of the issue price and are redeemable at the option of the shareholder at any time after 7 years. Shareholders wishing to exercise their redemption option must provide 3 months notice. On redemption the shareholder is entitled to the share’s issue price plus any accumulated unpaid dividend. In lieu of redemption a shareholder may elect that their RPS convert to ordinary shares of Swanco on a one for two basis (one RPS converts to 2 ordinary shares of Swanco.)

Required:

 - The Swanco bonds pay interest of 7%. Why do you think the RPS provide for a fixed preferential dividend of 8%? Explain your answer

 - In what circumstance will the conversion right in the RPS prove to be valuable? Be specific.