1. SKYFIRM PLC has just successfully issued 12-year convertibles in January 2022 to raise 70 million of new capital. The conversion price was set at 20.00 which was 3.00 higher than the market value of SKYFIRMs share price on the day of issue. The call protection period was set at three years and the first call price was set at 1025. The face value of one bond is 1000.

1. Calculate the conversion ratio, the conversion premium, the conversion value and the share price at which investors will be indifferent between choosing cash or shares. Draw a clearly labelled diagram to illustrate your answer. What are the advantages of a convertible bond issue for SKYFIRM?
2. It is now three years later and the share price for SKYFIRM has risen to 27 per share. What would you advise the firm to do? What techniques are available to the firm to encourage conversion?
3. The coupon rate for the convertible bonds is 7% and the dividend per share is 0.50 per year. Calculate the return on an investment of 1000 in these bonds after 3 years? What would be the return on investment of 1000 in the common stocks for the same period? Explain why these two answers are different.
4. Identify the key differences between warrants and exchangeable bonds?