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1. what is the meaning of floor value?
2. in part (a) the value of denoca co. using P/E ration is: EPS multiply by P/E ratio. why hav we taken the average sector P/E ration instead of taking $3.3/40c (i.e., share price/earnings per share).
The floor value is what the market value would be if the investors decided to take cash on redemption instead of taking shares.
So it is the present value of the future interest receipts and the cash redemption (in this question 100 because they are redeemed at par).
In a sense it is the ‘worst’ market value the bond could be, because if the shares are expected to be worth more then the investors will be expecting to convert to shares and so the market value will be higher.If you used the PE ratio of Danoca, then you would come back to the existing share price of $3.30 !!
When we use PE ratios to value a business we always use the average PE ratio for that type of business. The reason is that the PE is an indication of the level of growth that investors expect in that business sector. At the moment Danoca’s share price is lower than would be expected – maybe it is being managed badly, but Phobis might be able to manage it better and get the same sort of growth as in the rest of the business sector.
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