In 2013, Micron Technology (Micron), a leading supplier of advanced memory solutions, was eventually having a good year after several hard years. Since the start of the year, its share price rose above $14, a rise of more than 100% in July. Micron made heavy use of convertible debt financing to finance its operations and strategic targets and, it is close to $3 billion of outstanding convertibles, as of August 31, 2013.
When Micron’s share price had been below $10, these bonds issued between 2007 and 2013 had adverse earnings. If there would be an increase in Micron’s price of stock, then its capital costs would thus increase as well while there is a probability of increased wealth that could be transferred to business’s shareholders to bondholders.
The new notes would probably require a yearly coupon rate that is higher than bonds, which are retired; however, price of conversion would change approximately to $19, which is a premium of somewhere between 35%-to-40% of the latest stock prices. Foster required thorough catering of his prerequisite that costs in form of time and cash warranted refinancing of the bonds.
Students are offered a chance to contemplate why businesses might find convertible bonds an appealing type of lending by the Micron case. Due to its substantial use of convertibles, Micron picked different settlement alternatives to reduce dilution and has attentively staggered the maturities on the bond issues.
Students are requested to appraise the conditions of the new converts to see if they represent a reasonable exchange of value between investors and the issuer. Moreover, they are asked to compare the capital costs related to the new convert to the retired bonds to judge how Micron's capital costs are changed by the refinancing choice. This case has been used as an opening case in Darden's Corporate Funding elective and would function nicely in any course that considers various funding options.
Publication Date: 12/17/2014
This is just an excerpt. This case is about Finance
Related Case Solutions & Analyses:
Windhoek Nature Reserve: Financing a Sustainable Conservation Model in Namibia
EcoMotors International
Rameco Distribution
Trader Joe’s
Business Valuation: Standard Approaches and Applications
Enron Explained
Metro do Porto: An Interest Rate Swap
Asahi India Glass Limited: Leverage, A Double-edged Sword
Jos. A. Bank Clothiers, Inc.: The Men’s Wearhouse Bid
Potato Bonds: Regulating Spurious Derivative Instruments
