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SIGRA CO
My question is... is there any other way of calculating the bond
I don't seem to understand the way they calculated the bond market value using IRR when the question did not provide for tax
Please help
Method 3
An offer of a 2% coupon bond in exchange for 16 Dentro Co’s shares. The bond will be redeemed in three years at nominal value of $100.
Other information
Sigra Co’s non-current liabilities include a 6% bond redeemable in three years at nominal value which is currently trading at $104 per $100 nominal value.
Required:
(a) Estimate the percentage gain on a Dentro Co share under each of the above three payment methods. Comment on the answers obtained.
Part of the answer
Number of Sigra shares ($4.4/$0.4) 11 million
Sigra EPS ($4.95m/11m) $0.45 per share
Sigra price to earnings (P/E) ratio ($3.6/$0.45) 8
Dentro P/E ratio (8 × 1.125) 9
Dentro shares ($0.5m/$0.4) 1.25 million
Dentro EPS ($0.625/1.25m) $0.50 per share
Estimate of Dentro value per share ($0.5 × 9) $4.50 per share
Bond offer
Rate of return
$104 = $6 × (1 + r)?1 + $6 × (1 + r)?2 + $106 × (1 + r)?3
If r is 5%, price is $102.72
If r is 4%, price is $105.55
r is approximately = 4% + (105.55 ? 104)/(105.55 ? 102.72) × 1% = 4.55%
Price of new bond = $2 × 1.0455?1 + $2 × 1.0455?2 + $102 × 1.0455?3 = $93.00
Value per share = $93.00/16 = $5.81 per share
Dentro share percentage gain under bond offer
Bond offer: ($5.81 ? $4.50)/$4.50 × 100% = 29.1%
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Mergers and acquisitions
3y ago#1No, there is no other way.
The MV of a bond is the PV of the future receipts discounted at the investors required rate of return. Tax is not relevant for this because it is the investors who determine the market value and company tax does not affect their return.
The required return used is the required return on the existing bonds, which is the IRR of the flows to the investors on the existing bonds.
I do explain all of this in my free lectures.
But in this case we neither have the market value nor the required rate
So if I use a different r
Let's say I use 5% and 10%
Do I still have the same Market Value as the one they got when they used 5% and 4%
3y ago#3We find the required return by calculating the IRR for the existing bond.
The 'two guesses' approach to calculating the IRR only ever gives an approximation to the IRR (because it is not a linear relationship as I explain in my lectures) and so using different guesses will give a slightly (but only slightly) different final answer. However you would still get full marks. Now that there is the spreadsheet available, it is better (and faster) to use the IRR function in the spreadsheet instead of making two guesses - this would result in the exact IRR.
But how do I calculate IRR if I don't have market value for Dentro.
Market value was only provided for Sigra the acquirer
This is confusing for me like how do I input the information on excel if I don't have information like the market value
How will be able to have the PV
3y ago#5It is Sigra who is issuing the bonds (as a way of paying from Dentro under option 3) and as I wrote in my earlier reply we assume that the new bonds are in the same class as the existing bonds and therefore use the investors' required return on the existing bonds (for which we do have the market value) to apply to the new bonds in order to calculate a value for the new bonds.
Thank you so much for your patience. I understand it now.
3y ago#7You are welcome :-)
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