Given:

P/E Ratio = 17.5

EPS = $1.75

Conversion Price = $ 45

Coupon Rate of Convertible Bond = 5%

Conversion Value = $ 680.56

Required :

(i)

Formula : P/E = MPS / EPS

Using the P/E ratio to obtain the MPS

17.5 = MPS / 1.75

MPS = $ 30.625

This means as per the current industry trend of this sector the share price is quoting at
around $ 30.625

However, S&S is quoting a price of $ 45 , which means it is at a premium of 46.94%.

The conversion price is important because if the investors have to benefit, the price has to
increase beyond this.

It also has to be noted that the company may go public in the future, which will give the
investors an active secondary market for trading.

Even if the company does not go public, there will be an equity interest for the bond holders
and they can benefit if the company does well.

Req (ii)

Formula : Floor Value = ( Higher of Intrinsic Value & Conversion Value)

Conversion Value = $ 680.56

Note: Since rate of interest for discounting is not given in the question , assumed to be 4%

Intrinsic Bond Value = Coupon Payment * PVAF(r%,n) + Redemption Value * PVIF(r%,N)

Intrinsic Bond Value = 50 * PVAF (4%,20) + 1000 * PVIF (4%,20)

= $ 1135.82
Therefore, floor value is $ 680.56

Req (iii)

Formula: Conversion Ratio = Par Value of Bond / Conversion Price

Applying the formula;

Conversion Ratio =1000/45

                                  = 22.22

Req (iv)

Formula: Conversion Premium = {(Conversion Price – Conversion Value )/

Conversion Value } * 100

Applying the formula;

Conversion Premium (%) = { (45 – 30.625) / 30.625} * 100

                                         = 46.94 %

Conversion Premium ($) = 45 – 30.625

                                              = $ 14.375

MINICASE

S&S Air’s Ratios for Financial year 2014

1. Using the financial statements provided for S&S Air, calculate each of the ratios listed in the table for
the light aircraft industry.

Current ratio = Current asset/Current liabilities

=$ 2,186,520 / $ 2,919,000

= 0.74

Quick ratio = Current assets – Inventory / Current liabilities

= =$ 2,186,520 - 1,037,120 / $ 2,919,000

= 0.39

Cash ratio = Cash / Current liabilities

= $ 441,000 / $ 2,919,000
 = 0.15

Total asset turnover = Sales / Total assets

= $30,499,420 / $18,308,920

= 1.6

Inventory turnover = Cost of goods sold / Inventory

= $22,224,580 / 1,037,120

= 21.4

Receivables turnover = Sales / Accounts receivable

= $30,499,420 / 708,400

= 43.05

Total debt ratio = (Total assets – Total equity) / Total assets

= ( $18,308,920 - $10,069,920) / $18,308,920

= 0.45

Debt–equity ratio = Total debt / Total equity

= $ 5,320,000 / $10,069,920

= 0.53

Equity multiplier = Total assets / Total equity

= $18,308,920 / $10,069,920

= 1.82

Times interest earned ratio = EBIT / Interest

= $ 3,040,660 / 478,240

= 6.36

Cash coverage ratio = EBIT + Depreciation / Interest

= $ 3,040,660 + 1,366,680 / 478,240

= 9.22

Profit margin = Net income / Sales

= $ 1,537,452 / $30,499,420

= 5.04 %
Return on assets = Net income / Total assets

= $ 1,537,452 / $18,308,920

= 8.4%

Return on equity = Net income / Total equity

= $ 1,537,452 / $10,069,920

= 15.27%