Solutions to Ril Tocd Case Study

Financial Management (Case Study-1)

Reliance Industries Limited

Triple Option Convertible Debentures

Submitted By:

Group-8:

Abhishek Kumar (BLP038)

Aparna Chowdhry (BLP040)

Maninder Bisen (BLP042)

Vivek Kumar (BLP044)

Manjesh Bharati (BLP046)

Raman Girdhar (BLP048)

Question-1:

Discuss in detail the benefits of convertible securities for the issuing company as well as the investors. Briefly discuss the potential drawback of convertible securities for both?

Ans-1

Benefits to Issuer:

* Companies have incentive to raise convertible debt, rather than traditional debt, because the interest payments on convertible securities are usually lower, thus allowing the issuer to lock in a lower long-term financing cost when compared to traditional debt.

* Regardless of how profitable the company is, convertible security holders receive only a fixed, limited income until conversion. This is an advantage for the company because more of the operating income is available for the common stockholders. The company only has to share operating income with the newly converted shareholders if it does well. Typically, security holders are not entitled to vote for directors; voting control is in the hands of the common stockholders.

* Convertible securities are callable. This means that the issuer may redeem the securities at its discretion.

* The company has the right to forcibly convert them. Forced conversion usually occurs when the price of the stock is higher than the amount it would be if the security were redeemed, or this may occur at the security's call date.

* when a company is considering alternative means of financing, if the existing management group is concerned about losing voting control of the business, then selling convertible securities will provide an advantage, although perhaps only temporarily, over financing with common stock.

Drawback for Issuer:

* The...