Wells Fargo

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Introduction Wells Fargo & Co. The central question in this case is whether Wells Fargo should issue Convertible debt or not. If not Wells Fargo, ideally or theoretically speaking who should issue convertible debt? The discussion can revolve around the qualitative aspects of the convertible debt. The case also highlights the opportunistic financing and Atkins¶ philosophy of raising capital.

We will be analysing the case from two points of view. From the company¶s point of view as well as the investor¶s point of view.

Whether Wells Fargo and Co. should go ahead with the bonds issue or not?

1.1 History repeats itself

The table below shows the historical price, PE and EPS over the past 3 years.

Date 31-12-2000 31-12-2001 31-12-2002 01-04-2003

Price$ 28.19 21.9 23.67 23.2

EPS$ 2.36 1.99 3.19 2.11

P/E 11.94492 11.00503 7.420063 11

Although in the case it is mentioned that the price of Wells Fargo & Co. on 25th April 2003 was 47.45, we have found out that the actual price of the company was When one looks at the historical earnings of Wells Fargo & Co. we can see that over the past two years it has grown at a CAGR of 16.38%.

For Wells Fargo & Co. to reach $120 in 5 years the company would have to grow at a rate of 20.38%, if we assume that the current share price is fairly valued. Therefore, according to us, to have a sustainable growth rate of 20.38% is very difficult and hence the share price reaching $120 within 5 years is a rare occasion.

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1.2 Tax Benefits for Wells Fargo if the bonds are issued In the case it is mentioned that according to IRS rules, Wells Fargo would be eligible for deduction from income an interest amount which would be the prevailing market rates i.e. 5.8%. Therefore, the income tax saved here would be the tax rate on the difference between the market interest rates and bonds interest rates, i.e. 4.75% (5.8% - 1.05%).

So, the table below shows the interest amount saved per year and the tax amount...