Company X has capital of 2 million shares that are currently trading at €2000 per share. On its balance sheet it has a liability for an issue of convertible bonds with the following characteristics:
- nominal value: €500m (500 000 convertible bonds of face value €1000 each);
- interest rate: 5%;
- conversion ratio: 1 for 1;
Company X expects to have a net profit of €300m next year.
(a) Calculate X”s fully diluted earnings per share. The corporate income tax rate is 36.7%.
(b) Redo the same exercise, replacing the convertible bond with a bond with attached warrants to subscribe to one share of X at €2100. Assume the pre-tax rate of return on short-term investments is 8%. use two different methods to make your calculations.
(c) What would be the result of the calculation in (b) above if X issued the bond with warrants to pay off another borrowing at a pre-tax interest rate of 8%? Assume that the expected net profit is after interest expense on the previous borrowing.