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Again i don’t know if i will be able to explain this doubt to you. But i will try my best. Here it is:
I have a specific doubt which relates to part a) iii and iv. For a moment assume that the MV of debt is $50m. And if we do not include the Bahari project the shares could be either issued at $5.64/share or $4.51/share(if 20% discount considered). given this line: “the shares should be offered at a substantial discount of as much as 20% below the EXPECTED SHARE PRICE ON THE DAY OF LISTING” my understanding is that if the company issues shares at $4.51 then on the listing day as per company’s expectation it should be at $5.64/share. If the demand does not get fulfilled then presumably the shares will still list at $5.64(as that is the expected MV of the firm).
In that case the unsecured bondholders should technically remain indifferent between both the prices right? Whether the demand of public is conceded or not, the bondholders will have shares worth $5.64/share on the day of listing. and the total market valuation of their stake would be $56.4m which is way more than their, here assumed, debt MV of $50m.
so the bondholders will accept the share offer in this hypothetical scenario, right sir?
You are reading the question wrongly.
If they do not offer a discount then they will issue the shares at $5.64 per share.
There has been a suggestion (only a suggestion) that they should be issued at a discount of up to 20%. In which case they will be offered at less that $5.64, and if they did offer them at a discount of as much as 20% they would be issued at $5.64 – (20% x $5.64) = $4.51.Depending on what price they do end up being issued at, then the lower the price the more shares the bond holders will need to be given for it to be acceptable to them.
sir i was talking in the sense of issue price during IPO Vs. the listing price of the stock on its first day. so, if the stock is issued to shareholders at $4.51, if they get listed at $5.64(MV of the firm) on its first day then shareholders will gain. And for the bondholders it will only be a matter of days(time difference between IPO and listing date) before they see the stock they own be valued at 5.64*10m=$56.4m(i.e. on the listing day).
No. Although the wording of the question could be better, the situation is that they need to decide whether to issue the shares at $5.64 or instead to issue them at a lower price. The expected issue price is $5.64, but they are considering issuing at a discount instead and therefore issuing at a lower price. Potential investors suggest a discount of as much as 20% and if they did issue at a discount of 20% then they would be issuing them at $4.51.
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