Corning Inc,

AFM471 case 13

Corning, Inc.: 2015 Convertible zeroS

Advance Study Questions:

1. Why do you suppose Corning is issuing convertible bonds and concurrently offering common stock?

2. Please interpret case Exhibit 5. What are these traditional descriptive ratios? What do they show?

3. Please review the Appendix to the case below, which gives one analyst’s valuation of the bonds. Prepare to describe in class the analyst’s approach and evaluate the underlying assumptions. In particular,

□ How is the straight bond valued?

□ How is the conversion option valued?

- Should Julianna adjust the stock price for dividends?

□ What does Corning’s redemption option allow the company to do? When would you expect them to do so?

□ How are the redemption and put options valued?

□ Why is volatility so important? At the volatility implied in the offering price, are these bonds an attractive investment?

4. Should Coopers invest in the zeros? Please summarize your position.

Appendix

Corning, Inc.: Zero Coupon Convertible Debentures

due November 8, 2015

To: Investment File

From: Julianna Coopers, investment analyst

Date: November 8, 2000

This memo summarizes my valuation analysis of the Corning Zeroes of November 2015. In essence, I viewed the convertible bond as having several components, which could be valued separately, then summed. The components are:

• Straight bond. This component could be valued by discounting the payment of $1,000 in 2015 at the appropriate yield on stripped bonds of similar maturity and risk.

• Conversion option. This is a call option held by the investors.

• Redemption option. This is a call option on the bond held by Corning. Redemption options are typically used to force conversion of a bond.

• Put option. At two dates, investors have the right to put the bond...