Conversion structure

0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
1.05
1.1
1.15
1.2
1.25
1.3
1.35
1.4
1.45
1.5
1.55
1.6
1.65

0
1.58730159
3.17460317
4.76190476
6.34920635
7.93650794
9.52380952
11.1111111
12.6984127
14.2857143
15.8730159
17.4603175
19.047619
20.6349206
22.2222222
23.8095238
25.3968254
26.984127
28.5714286
30.1587302
31.7460317
33.3333333
34.9206349
36.5079365
38.0952381
39.6825397
41.2698413
42.8571429
44.4444444
46.031746
47.6190476
49.2063492
50.7936508
52.3809524

3.843
26.021

Payoff diagram - 7 up 22
140
120

Convertible Preferred

1 - BASE CASE SCENARIO

par
100
premium
22%
share price
3.15
#shares
31.746

100
80
60

40
20
0
0

0.5

1.5

2.5

Stock Price

1.7
1.75
1.8
1.85
1.9
1.95
2
2.05
2.1
2.15
2.2
2.25
2.3
2.35
2.4
2.45
2.5
2.55
2.6
2.65
2.7
2.75
2.8
2.85
2.9
2.95
3
3.05
3.1
3.15
3.2
3.25
3.3
3.35
3.4
3.45
3.5
3.55
3.6
3.65
3.7
3.75
3.8
3.843

53.968254
55.5555556
57.1428571
58.7301587
60.3174603
61.9047619
63.4920635
65.0793651
66.6666667
68.2539683
69.8412698
71.4285714
73.015873
74.6031746
76.1904762
77.7777778
79.3650794
80.952381
82.5396825
84.1269841
85.7142857
87.3015873
88.8888889
90.4761905
92.0634921
93.6507937
95.2380952
96.8253968
98.4126984
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100

3.9
3.95
4
4.05
4.1
4.15
4.2
4.25
4.3
4.35
4.4
4.45
4.5
4.55
4.6
4.65
4.7
4.75
4.8
4.85
4.9
4.95
5

101.483216
102.784283
104.08535
105.386417
106.687484
107.988551
109.289617
110.590684
111.891751
113.192818
114.493885
115.794952
117.096019
118.397086
119.698152
120.999219
122.300286
123.601353
124.90242
126.203487
127.504554
128.805621
130.106687

yoff diagram - 7 up 22

2.5

Stock Price

3.5

4.5

0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
1.05
1.1
1.15
1.2
1.25
1.3
1.35
1.4
1.45
1.5
1.55
1.6
1.65

0
1.58730159
3.17460317
4.76190476
6.34920635
7.93650794
9.52380952
11.1111111
12.6984127
14.2857143
15.8730159
17.4603175
19.047619
20.6349206
22.2222222
23.8095238
25.3968254
26.984127
28.5714286
30.1587302
31.7460317
33.3333333
34.9206349
36.5079365
38.0952381
39.6825397
41.2698413
42.8571429
44.4444444
46.031746
47.6190476
49.2063492
50.7936508
52.3809524

3.623
27.605

160
140
Convertible Preferred

2 - WITH 15% PREMIUM ONLY

par
100
premium
15%
share price
3.15
#shares
31.746

120
100
80
60
40
20
0
0

1.7
1.75
1.8
1.85
1.9
1.95
2
2.05
2.1
2.15
2.2
2.25
2.3
2.35
2.4
2.45
2.5
2.55
2.6
2.65
2.7
2.75
2.8
2.85
2.9
2.95
3
3.05
3.1
3.15
3.2
3.25
3.3
3.35
3.4
3.45
3.5
3.55
3.6
3.623
3.7
3.75
3.8
3.85

53.968254
55.5555556
57.1428571
58.7301587
60.3174603
61.9047619
63.4920635
65.0793651
66.6666667
68.2539683
69.8412698
71.4285714
73.015873
74.6031746
76.1904762
77.7777778
79.3650794
80.952381
82.5396825
84.1269841
85.7142857
87.3015873
88.8888889
90.4761905
92.0634921
93.6507937
95.2380952
96.8253968
98.4126984
100
100
100
100
100
100
100
100
100
100
100
102.139406
103.519669
104.899931
106.280193

3.9
3.95
4
4.05
4.1
4.15
4.2
4.25
4.3
4.35
4.4
4.45
4.5
4.55
4.6
4.65
4.7
4.75
4.8
4.85
4.9
4.95
5

107.660455
109.040718
110.42098
111.801242
113.181504
114.561767
115.942029
117.322291
118.702553
120.082816
121.463078
122.84334
124.223602
125.603865
126.984127
128.364389
129.744651
131.124914
132.505176
133.885438
135.2657
136.645963
138.026225

Buyers benefit more from upside (lower strike price of the implied option)
Shareholders more diluted
Shareholders have to issue more shares. 27.605 at P=3.623 instead of 26.021 at P=3.843
No effect on the down side
Effect on the value of the new security?

Payoff diagram

0.5

1.5

2.5

3.5

Stock Price

20.42
81.97
102.39
81.967

106.78435

4.5

Implied Volatility
Option type Maturity
Strike Price Volatility
Call
Jan-05
5
0.871
Call
Jan-05
7.5
0.834
Call
Jan-05
10
0.78
Average
0.82833333

4.5

Convertible componet value

Security type Position
Maturity
Time to maturity
Stock Price Strike Price
Shares
31.746 3.15 Call
-31.746 8/16/2005
3.00
3.15
3.15
Call
26.021 8/16/2005
3.00
3.15
3.843

Call (K=3.15)

Call (K=3.843)

Stock Price now (P)

3.15
Exercise Price of Option (EX)
3.15
Number of periods to Exercise in years (t)3
Compounded Risk-Free Interest Rate1.75%
(rf)
Standard Deviation (annualized s) 82.83%
d1
0.7540
d2
-0.6808
Value of Call
1.70

Stock Price now (P)

Exercise Price of Option (EX)
Number of periods to Exercise in years (t)
Compounded Risk-Free Interest Rate (rf)
Standard Deviation (annualized s)
d1
d2
Value of Call

Volatility
Risk Free
Value per security
Total Value
0.82833333 100
0.82833333
0.0175
1.7
-53.9682
0.82833333
0.0175
1.55
40.33255
Total Value
86.36435

3.15
3.84
3
1.75%
82.83%
0.6154
-0.8194
1.55