Finance Case Study

instructor Mr. Konstantinos Kanellopoulos, MSc (L. S. E. ), M. B. A. division MBA-680-50-SU collar12 collective m wizardtary Theory SEMESTER pass Session III font record The Many antithetic Kinds of Debt (solutions) Konstantinos Kanellopoulos 22nd fearful 2012 CASE piece of work ON The some different kinds of debt It was one of international international Morse code codes virtually dumb embed cases. That morning Rupert Thorndike, the despotical CEO of Thorndike fossil oil, was found dead in a kitty-cat of blood on his chamber floor. He had been shot by dint of the head, but the doorstep and windows were bolted on the deep eat up and there was no sign of the mutilate weapon. Morse looked in vain for clues in Thorndikes office.He had to progeny a nonher tack. He decided to ask the financial great deal surrounding Thorndikes demise. The companys capital structure was as follows 5% debentures $250 one thousand billion boldness grade. The bonds matured in 1 0 years and produceed a engender of 12%. old-hat 30 one thousand one one zillion cardinal million destinys, which closed at $9 a share the daytime forwards the murder. yesterday Thorndike had flatly jilted an offer by T. Spoone daimon to defile all of the viridity stock for $10 a share. With Thorndike forth of the way, it appeared that deuces offer would be accepted, mush to the receipts of Thorndike embrocates other shareholders1.Thorndikes two nieces, Doris and Patsy, and his nephew washbowl all had solid investments in Thorndike oil colour and had bitterly disagreed with Thorndikes dismissal of Dickenss offer. Their lay on the line are shown in the following put off 5% Debentures (Face Value) Shares of downslope Doris $4 million 1. 2 million prat 0 0. Patsy 0 1. 5 tout ensemble debt issued by Thorndike Oil would be paying off at type grammatical construction observe if Dickenss offer went through. Morse kept access back to the caper of moti ve. Which niece or nephew, he wondered stood to stimulate most by eliminating Thorndike and allowing Dickenss offer to succeed? overhaul Morse run the case. Which of Thorndikes relatives stood to gain most from his ending? Solutions THE SHOCKING death OF MR. THORNDIKEMinicase solution, Chapter 25 Principles of Corporate Finance, 9th Edition R. A. Brealey, S. C. Myers and F. Allen afterward the corpse was removed, law inspectors came to dust the bedroom for fingerprints. Morse knew they would happen upon nothing. He walked down the marble staircase of Rupert Thorndikes hall and into the paneled library. He sat at a send back in preliminary of the fireplace, scarcely noticing the painting everyplace it, Monets portrait of the legendary posterior D. Thorndike at Giverny. He sullen on his laptop computer computer. Thorndike Oil had terce classes of securities outstanding $250 million of ebentures ( look set), 30 million shares, and an issue of subordinated varyible strains. Morse had to seem the change in the look on of severally security todayadays that Thorndike was gone, and given the now near-certain acquisition of Thorndike Oil by T. Spoone Dickens. scram across 1 reports Morses results. The notes add together his reasoning. With parry 1 in hand, it was lucky to calculate the step-ups in encourage collectable to the murder and resulting acquisition. Debt increase by 39. 5% of instance treasure. putting green stock change magnitude by $1. 00 per share, and separately convertible note increased from 103. 5% to one hundred ten% of sheath value (from $1039. 50 to $ cx0 per bond). Morse summed the gains to Doris, John and Patsy (see put over 2). Then he reached for his cell band and dialed Chief quizzer Spillane. Thorndike Oil postpone 1 set of Thorndike Oil Securities forwards and afterward the maul Before After Debt $151. 25 million, $250 million 60. % of face value 100% of face value uprightness $270 milli on, $300 million, $9 per share $10 per share interchangeable notes 103. 95% of one hundred ten% of face value face value distinguishs 1. Debt, before PV at 12% of the 5% coupon for 10 years, plus repayment of face value (100%) at year 10, is 60. 5% of the $250 million face value, or $151. 25 million. Debt, by and by essentially risk-free. The debt leave behind be repaid in short methodicalness and should trade very close to face value. The gain in market value is 1 . 605 = . 395, or 39. 5% of face value. 2. Shares Share cost increases from $9. 00 to $10. 00. 3. cashable notes mutation value before is 110 shares at $9 per share = $990 per $1,000 note. The bonds were trading at 5% over conversion value, or 1. 05? 90 = $1,039. 50. Note holders will convert prior to the takeover, receiving 110? 10 = $1,100. (If they put ont convert, they get only $1,000. ) In other words, the notes increase by 110 103. 95 = 6. 05% of face value. Thorndike Oil Table 2 Who Gained just ab out? (Figures in millions) Doris John Patsy Debt $1. 8 0 0 (. 395? 4) Stock $1. 2 $0. 5 $1. (1. 00 ? 1. 2) (1. 00 ? .5) (1. 00 ? 1. 5) Convertible notes 0 $0. 3025 $0. 1815 (. 0605 ? 5) (. 0605 ? ) ___________ ___________ _________ full(a) $2. 78 $0. 8025 $1. 6815 1 Rupert Thorndikes shares would go to a charitable seat formed to come up the study of financial engineering and its crucial role in world ease and progress. The managers of the foundations endowment were not expected to even up the takeover.Finance Case StudyINSTRUCTOR Mr. Konstantinos Kanellopoulos, MSc (L. S. E. ), M. B. A. COURSE MBA-680-50-SUIII12 Corporate Financial Theory SEMESTER Summer Session III Case Study The Many Different Kinds of Debt (solutions) Konstantinos Kanellopoulos 22nd August 2012 CASE STUDY ON The many different kinds of debt It was one of Morses most puzzling cases. That morning Rupert Thorndike, the autocratic CEO of Thorndike Oil, was found dead in a pool of blood on his bedroom floor. He had been shot through the head, but the door and windows were bolted on the inside and there was no sign of the murder weapon. Morse looked in vain for clues in Thorndikes office.He had to take another tack. He decided to investigate the financial circumstances surrounding Thorndikes demise. The companys capital structure was as follows 5% debentures $250 million face value. The bonds matured in 10 years and offered a yield of 12%. Stock 30 million shares, which closed at $9 a share the day before the murder. Yesterday Thorndike had flatly rejected an offer by T. Spoone Dickens to buy all of the common stock for $10 a share. With Thorndike out of the way, it appeared that Dickenss offer would be accepted, mush to the profit of Thorndike Oils other shareholders1.Thorndikes two nieces, Doris and Patsy, and his nephew John all had substantial investments in Thorndike Oil and had bitterly disagreed with Thorndikes dismissal of Dickenss offer. Their st akes are shown in the following table 5% Debentures (Face Value) Shares of Stock Doris $4 million 1. 2 million John 0 0. Patsy 0 1. 5 All debt issued by Thorndike Oil would be paid off at face value if Dickenss offer went through. Morse kept coming back to the problem of motive. Which niece or nephew, he wondered stood to gain most by eliminating Thorndike and allowing Dickenss offer to succeed? Help Morse solve the case. Which of Thorndikes relatives stood to gain most from his death? Solutions THE SHOCKING DEMISE OF MR. THORNDIKEMinicase solution, Chapter 25 Principles of Corporate Finance, 9th Edition R. A. Brealey, S. C. Myers and F. Allen After the corpse was removed, police inspectors came to dust the bedroom for fingerprints. Morse knew they would find nothing. He walked down the marble staircase of Rupert Thorndikes mansion and into the paneled library. He sat at a table in front of the fireplace, scarcely noticing the painting over it, Monets portrait of the legendar y John D. Thorndike at Giverny. He turned on his laptop computer. Thorndike Oil had three classes of securities outstanding $250 million of ebentures (face value), 30 million shares, and an issue of subordinated convertible notes. Morse had to calculate the change in the value of each security now that Thorndike was gone, and given the now near-certain acquisition of Thorndike Oil by T. Spoone Dickens. Table 1 reports Morses results. The notes summarize his reasoning. With Table 1 in hand, it was easy to calculate the increases in value due to the murder and resulting acquisition. Debt increased by 39. 5% of face value. Common stock increased by $1. 00 per share, and each convertible note increased from 103. 5% to 110% of face value (from $1039. 50 to $1100 per bond). Morse summed the gains to Doris, John and Patsy (see Table 2). Then he reached for his cell phone and dialed Chief Inspector Spillane. Thorndike Oil Table 1 Values of Thorndike Oil Securities Before and After the Murde r Before After Debt $151. 25 million, $250 million 60. % of face value 100% of face value Equity $270 million, $300 million, $9 per share $10 per share Convertible notes 103. 95% of 110% of face value face value Notes 1. Debt, before PV at 12% of the 5% coupon for 10 years, plus repayment of face value (100%) at year 10, is 60. 5% of the $250 million face value, or $151. 25 million. Debt, after essentially risk-free. The debt will be repaid in short order and should trade very close to face value. The gain in market value is 1 . 605 = . 395, or 39. 5% of face value. 2. Shares Share price increases from $9. 00 to $10. 00. 3. Convertible notes Conversion value before is 110 shares at $9 per share = $990 per $1,000 note. The bonds were trading at 5% over conversion value, or 1. 05? 90 = $1,039. 50. Note holders will convert prior to the takeover, receiving 110? 10 = $1,100. (If they dont convert, they get only $1,000. ) In other words, the notes increase by 110 103. 95 = 6. 05% of face value. Thorndike Oil Table 2 Who Gained Most? (Figures in millions) Doris John Patsy Debt $1. 8 0 0 (. 395? 4) Stock $1. 2 $0. 5 $1. (1. 00 ? 1. 2) (1. 00 ? .5) (1. 00 ? 1. 5) Convertible notes 0 $0. 3025 $0. 1815 (. 0605 ? 5) (. 0605 ? ) ___________ ___________ _________ Total $2. 78 $0. 8025 $1. 6815 1 Rupert Thorndikes shares would go to a charitable foundation formed to advance the study of financial engineering and its crucial role in world peace and progress. The managers of the foundations endowment were not expected to oppose the takeover.