Black Swan Development Co Ltd ('Swanco') is a Fiji company. Shares of Swanco are largely owned by Chinese investors. Swanco is a subsidiary of Evergreen Limited a large China company. Both Swanco and its parent are engaged in the business of land development.

Swanco has a number of development projects in Fiji. Funding for the company's projects is being raised by an issue of bonds to Fiji investors. The bonds are formally called the 'Swanco $100 7 year 7 percent Registered Bonds'. The company plans to issue bonds having an aggregate face value of FJD $28 million.

The company announces that of the planned bond issue has already been placed with Fiji institutions priced at $101. The remaining has been reserved for retail investors and priced at $99.50. Members of the public have shown considerable interest in the offering and close to 80% of the bonds reserved for retail investors have already found buyers.

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:

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

Black Swan Development Co Ltd ('Swanco') is a Fiji company. Shares of Swanco are largely owned by Chinese investors. Swanco is a subsidiary of Evergreen Limited a large China company. Both Swanco and its parent are engaged in the business of land development.

Swanco has a number of development projects in Fiji. Funding for the company's projects is being raised by an issue of bonds to Fiji investors. The bonds are formally called the 'Swanco $100 7 year 7 percent Registered Bonds'. The company plans to issue bonds having an aggregate face value of FJD $28 million.

The company announces that of the planned bond issue has already been placed with Fiji institutions priced at $101. The remaining has been reserved for retail investors and priced at $99.50. Members of the public have shown considerable interest in the offering and close to 80% of the bonds reserved for retail investors have already found buyers.

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:

1. In what circumstance will the conversion right in the RPS prove to be valuable? Be specific.
2. The Swanco bonds pay interest of 7%. Why do you think the RPS provide for a fixed preferential dividend of 8%? Explain your answer