Question 2 (25 marks) Better Hong Kong (BHK) Corporation is a venture capital company. It was incorporated and listed on the Growth Enterprise Market (GEM) three years ago. Since incorporation, the company has been rather successful and its shares are currently trading at $4.5 per share Apart from ordinary shares, BHK has issued an 8% convertible bond, redeemable in 2028. The face value of the convertible bond is $1,000 with coupons payable semi-annually and a conversion price of S5 Conversion may take place at any time over the next two years. The current market price of BHK's convertible bond is $950. The yield to maturity Of coupon bonds with a similar risk profile is 10%. Assume that it is now the end of 2018 and bond interest has already been paid. The board of directors expects BHK's share price to rise at 12% per year. No dividend is anticipated for the coming two years As a holder of BHK's convertible bond, assess which of the following actions you would choose to maximize the value of your investment. Explain your decision with a comparison of payoff from each action. a i Hold the bond until maturity Sell the bond immediately iii Convert the bond to shares now iv ii Convert the bond at the end of second year (11 marks) b Explain the differences in payoffs from actionsi), and (ii) (6 marks) c Discuss the factors to be considered when using a convertible bond as a way of raising finance (8 marks)