Session 04

Class Participation

Abinash Mishra
B23005

1/16/2024
1. What was the topic of discussion?
Instance 01: Why was the stock wrongly priced? Because firm was not aware of the real price
Instance 02: Why is the firm not keen on issuing equity?
Instance 03: Why is debt not beign taken since it was discussed in previous classes that increase in
debt help in increasing ROE(Return on Equity)
Instance 04: What are the conditions over which the bond can be redeemed
Instance 05: Question asked by classmate Priya as to why bonds are rated as CCC when the investors
are demanding the stock? That is if the company stock is so much in demand why is the bond rating
so low ?
Instance 06: Why did Boston Chicken issue a convertible bond? What is the advantage for both
parties if the bond gets converted?

2. The point raised by me

Instance 01: Why was the firm not aware of the real price(asked by sir)? I tried answering but the
answer was incorrect which led sir to explain the answer

3. Outcome of discussion / further research done by me

Instance 01: Asymmetry of information prevents firms from getting true price. Price is a function of
desperateness of buyer and willing to pay). Large demand leads to over subscription – the unmet
demand goes to market and it jacks up the price(as is the case of Boston Chicken).

Instance 02: Dilution of control , Fearing not enough demand in the market , Liquidation

Instance 03: If earning is negative, ROE will become more negative and is of not much use.

Instance 04:
 Redemption is possible if the stock hits 140% of the strike price. 140% of strike price = ~79$
 Change in control of the bond
 Overallocation/overallotment of bond in case if it is oversubscribed

Instance 05:
1. Expectation of lenders varies from those of the equity holders. Lenders expect a smooth cash
flow. Equity shareholder expect a better business model and regular cash flow are not the
most important criteria
2. Lenders are interested in the time period for which they have lent the money to the firm where
as investors have a taken a long view of the firm and therefore for them the bond rating is
 immaterial. Therefore, the share is a good investment for a shareholder whereas not attractive
for a lender reflecting in the CCC rating
Instance 06:
1. Boston Chicken wants the holder to convert; the moment the company set the yield at 4.5%,
the signalling to the investors was to hold the bond for conversion. An investor eyeing only
cash flow wouldn’t find the convertible bond attractive by itself.
2. Convertibles are never issued for the purpose for debt but for the purpose of getting converted
3. If the bond doesn’t get converted then Boston Chicken would have to raise 130 mn $ which
the firm wouldn’t be wanting to do
4. There are two ways of looking at the problem:
a. If the holder sells it before the bond tenure length it stands to missout on cash
payment
b. If the holder holds it too long there is a chance that the price may fall
5. When the convertible goes in the money and the holder is not redeeming there is a redemption
option that is provided by which the company threatens to redeem the bond.