SMS plc is about to make an issue of some convertible debentures and wants

to raise $2$m in total. The company currently has $3$ million shares in issue. The

convertible bonds will have a par value of $100$ and will have a fixed coupon

of $5\%$ per annum. The bonds will have the option of converting into $30$ shares

in five years' time or being redeemed at par in seven years. Investors in

convertibles of this nature require a return of $9\%.$ The current share price of

SMS plc is $3\mathrm{.}56.$ It is expected the company's share price will grow at a rate

of $7\%$ per annum over the next five years. The company's current market

value of debt prior to the issue is $6\mathrm{.}5$m$.$

Required:

$(1)$ Calculate the floor value of the convertible debenture

$(2)$ Calculate the likely market value at which the convertibles will be

issued at

$(3)$ Quantify the impact on SMS plc$\text{'}$s ownership structure

$(11$ marks$)$

$($b$)$ SMS plc has some warrants currently in issue. Each warrant allows the holder

to buy $10$ shares at a price of $3$ in one year's time. If the warrants are

currently trading at $5,$ compare the rate of return shareholders will make over

the next year compared to warrant holders. The dividend over the next year

can be assumed to be $30$p per share.

$(5$ marks$)$