(a) Explain the advantages to a company of issuing loan stock convertible to shares.
(b) Convex plc has in issue 10% convertible loan stock which will be redeemed in 10 years’ time and is currently selling at £93 per £100 block. Interest on the loan stock is paid annually and each £100 block is convertible into 25 shares at any time over the next two years. The current market price of Convex plc’s ordinary shares is £3.20 per share and it is expected that this will increase by 14% per year for the foreseeable future. Loan stock of a similar risk class is currently yielding 12%.
Advise an investor who holds some of Convex plc’s convertible loan stock as to which of the following courses of action to take:
(i) Sell the convertible loan stock now
(ii) Convert it in two years’ time
(iii) Hold the loan stock to maturity
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