# Task 2: Convertible Bond (30 points – maximum 4 pages) On December 31, 2020, Kompakt AG issued a convertible bond with a nominal value of 100 million euros. The total issuance is divided into 100,000 units at 1,000

Task 1: Financing Comparison (30 points – maximum 3 pages) A company has received two loan offers:

1.      An annuity loan A of 400,000 euros with a term until full repayment of five years and an annual annuity payment of 100,000 euros due at the end of each year.

2.      A bullet repayment B of 400,000 euros, due in five years, with an interest rate of 10% per annum. The company’s current overdraft account is in deficit.

There is a 40% probability that the overdraft account will remain in credit in the four periods following t = 1. • With the complementary probability, the overdraft account will remain in deficit until and including t = 5. The bank managing the overdraft account charges an interest rate of 20% for deficits and 10% for credits. The overdraft account is settled annually.

a)                Calculate the profitability of the two loan offers, differentiating between situations H (overdraft account in credit from t = 1) and S (overdraft account permanently in deficit). (20 points)

b)               Discuss, based on your results from a), the business decision regarding which of the two loan offers should be preferred. (10 points)

Task 2: Convertible Bond (30 points – maximum 4 pages) On December 31, 2020, Kompakt AG issued a convertible bond with a nominal value of 100 million euros. The total issuance is divided into 100,000 units at 1,000 euros each. Three warrants are attached to each of these units at the time of issuance. Each warrant entitles the holder to purchase a share with a face value of 100 euros. The exercise price upon exercise is 180 euros per share. The newly issued shares upon exercise of the warrants are identical to the old shares.

Interest payments on the bond are made annually in arrears. The nominal interest rate is 5%. The bond matures at par on December 31, 2030. The issue price is 1,250 euros per unit. The right to acquire the shares can be exercised from the issuance date until December 31, 2025, at unchanged conditions.

In the stock market, both the convertible bond cum (with warrants) and the convertible bond ex (without warrants), as well as the warrants themselves, are listed from the issuance date.

a)                Calculate the yield to maturity of the convertible bond ex, which is the return that would accrue to the bondholder in case the conversion right is not exercised at bond maturity. (7 points)

b)               The market interest rate for comparable bonds with the same maturity and no warrants is ten percent on December 31, 2020. What should be the market price for the bond without warrants on the issuance date? (10 points) On December 31, 2025, Kompakt AG’s shares with a face value of 100 euros are trading at 400 euros. None of the issued warrants have been exercised by that date. At this time, Kompakt AG has a share capital of 300 million euros.

c1) Discuss potential effects on the stock price if all warrants are exercised on December 31, 2025. (8 points) c2) Investor A holds 15 warrants. What could be the value of these warrants on December 31, 2025? (5 points)

Task 3: Capital Structure (30 points – maximum 4 pages) Please revisit Tasks 1 and 2, this time from a capital structure theoretical perspective on each company.

a)                What changes could the capital structure of each company undergo through the respective financing measures? (10 points)

b)               What significance or advantages, compared to alternative financing instruments, could the issuance of the convertible bond have under the Modigliani & Miller theorems? (10 points)

c)                What conclusions could an external observer draw from the fact that the respective company chooses the specific financing method, especially from the perspective of a proponent of the Pecking Order Theory? (10 points)