Symantec Corporation Convertible Notes With Call Spread Harvard Case Solution & Analysis

Symantec Corporation Convertible Notes With Call Spread Case Solution

Question 2

The $19.12 strikes are priced using the discounted cash flow model. The notes, which will be expired in 2011, will pay coupon rate of 0.75% and the notes expiring in 2013, would pay a coupon rate of 1% per annum. The resulting price for the strike options is calculated $0.91 per option as shown below.

Question 3

The Symantec Corporation should issue convertible bonds, as it would lead to delayed dilution cost of the company’s common stock and the earnings per share. Moreover, the convertible notes enable the company to issue bonds at very lower coupon rates comparedto the straight notes. As the conversion feature is preferred by the investors, so it requires less return. It can also be referred as more attractive a conversion feature, the lower yield will be offered for selling the issue.

The other advantage is that the convertible notes are preferred by the companies with low credit ratings. As it’s mentioned that the rating has not been assigned to the Symantec Corporation by any rating agency and it would be close to BB (according to S&P ratings). The companies prefer convertible stocks, asit would reduce their financing costs and also the convertible feature is added in a hope that if stock prices would rise, the bonds will be converted into the shares.

Through this logic, the convertible bonds are preferred by the issuers as it allows the seller to sell common stock at a higher price (more than the current price) indirectly. However, from the buyers’ perspectives, the convertible notes are attractive as it enables-them to generate larger returns associated with the stocks, while remaining safe under the bond features.

However, the issuance of convertible notes come with a disadvantage too. The financing through convertible socks bring risk towards diluting the company’s earnings per share and the loss of ownership too. If a major investor purchase the large part of the issue, it may lead towards having loss incurrences in ownership, voting rights and control by the company’s original shareholders.

Question 4

The current spot price of Symantic Corporation is $15.63, and if the company issued the convertible notes at a price of $27 and it must have offered a high premium of higher than 7.5% annually. If the notes are purchased by an investor and if the spot price remains under $27, then the note holders would not convert their bonds into shares. As a result of such situation, the Symantec Corporation would have to bear higher costs and there is a possibility of paying the money back to the investors and its seems that Symantic requires additional money in order to get out of this trouble. So, issuing notes along with a call spread at 19.12, is a better option as compared to issuing note with a conversion price of $27.3.

Question 5

The transaction of the hedge participants is detailed as below, which shows that the hedge participants will take a long position at $27.3 and they will pay a total of $326 million and by taking a short position at $19.12, the hedge participants will receive a total of $592 million. In total, the hedge participants would a receive  payoff of $266 million, so in order to reduce the risk associated with the cost of the transaction; the hedge participants world be purchasing the company’s stocks from the secondary and to remain safe; the hedge participants should hold a total of $110 million shares.

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