Symantec Corporation Convertible Notes

  • Uncategorized

SymantecCorporation Convertible Notes

Class

Question1

Symantecwas given a proposal by its investment bank to buy a call spread onits shares and issue it to note holders upon conversion. Themanagement of Symantec is not aware of the motivation structurebehind the transaction and why they would intend to buy a callspread. They, therefore, come to me for advice on the matter. Aconvertible bond is a kind of debt financing where a company issues abond to investors and shareholders, which can be later converted intoshares. This type of bond often has lower rates of return and shouldbe converted rather than being repaid. Symantec should issueconvertible bonds due to the following reasons. Regardless of theamount of income, the company will receive a fixed amount of loanuntil the conversion of the bond. This will benefit the company inthe sense that more operating income will be available to distributeto the shareholders. Typically, this would be disadvantageous to thebondholder as he or she would not be allowed to vote at the annualgeneral meeting of Symantec. The company should issue convertiblebonds to help it secure equity financing in a delayed manner. Thisprocess will delay the earnings per share diluted thus profiting thecompany since they will not have to pay more dividends to theinvestors. Because the company knows the tax that they will be taxedon the convertible bond that is 35 percent in U.S, the can plan andforecast for their income. With this numerous advantages, I wouldlike most definitely advice Symantec to consider the option ofissuing convertible bonds.

Symantecalso wants the advice on why they should buy a call spread. A callspread is an option strategy that can be created when an equal numberof calls can be bought and sold at the same time. It can be a bullspread or a bear spread. A bull call spread is used when the companythinks that the stock price will rise even before the call expires.It involves buying a lower spread call and selling it at a higherprice. An advantage of this type of spread is that it helps minimizethe risk of falling shares while at the same time setting targets tomeet the company’s forecasts. Before initiating a trade on a bullspread, Symantec should consider the underlying stock, what its stockprice today is, and whether the company believes that there is apossibility of the prices rising. They should also consider theexpiration date of the stock and the volatility of the stock. A bearcall spread is used when the company believes that the price of thestock will fall before the call expires. However, when Symantecdecides to issue a bear call spread, there are some disadvantagesthat come with it. The company will rip a limited amount of profitthough the risk on the investment will be low.

Symantechas negotiated with some hedge participants to issue a call spread onhedging. Here, the company would buy 110 million shares at a strikeprice of $19.12 and sell them when the price per share is $27.3175.58 million calls would expire in June 2011 while the remaining 52million would expire in June 2013. This type of call spread is calleda bull spread. If the company wanted to convert the bonds in future,it had the option to buy from banks the same amount of shares issuedto note holders at a price of $19.12 but if this price increased to$27.3175, it had the option to buy the bonds at the latter price. Dueto the short economic recession, the company’s cost of capital waslow in mid-2005. Considering Symantec’s financial statements of2001-2006, the company had increased profits that favoured investorsas they would get higher returns and the company’s cash flows forevery period were increasing. Symantec’s shares have an impliedvolatility rate of 34.29 percent, a stock volatility rate of 35.9percent and a 5-year U.S Treasury yield on bonds of 4.95 percent(Symantec.com, 2015). This implies that stocks of Symantec are notrisky to invest in, and investors who are risk averse should considerthis. The Treasury yield on bonds implies that when the companyissues bonds they will realize a return of 4.95 percent, which ishigher considering the market standard of other bonds. According toBloomberg, the company’s treasury bonds yield is highest in June2000. In January 2005, the company had the highest stock price, whichrealized a decrease in January 2006 (Bloomberg.com, 2016). NASDAQ andS&ampP 500 indicate that the company had a high market in January2000, which decreased but began to increase at the beginning ofJanuary 2006 (NASDAQ.com, 2006).

Thecompany was motivated to buy a call spread for some reasons. Thevolatility and risk of the shares were low, and the company wascapable of realizing the forecasted returns from the issue and saleof the bonds. The company could also be able to undervalue stockswhen buying them and short sell them to realize higher returns. Thiswould motivate the company in that they would receive a higher returnthan when they bought and sold the shares at a fixed price. It alsomotivated them because they would need to invest less capital sincethe short selling the stock would cover the difference in the capitalrequirement. This bear spread also could minimize losses to thecompany, and this implies that the company would limit its profitpotential. Here, Symantec would be able to forecast and plan for itsprofit or loss and know what to expect from its operations. Symantecwas motivated to find out that they could sell their bonds at ahigher price when converting them to shares at an expiry date. Theyknew that investors would fall for this, and this would hence delaythe earnings per share diluted of the company’s stocks (S&ampP500, 2015).

Question2

Symantechas an option of converting the bonds into shares at expiry ormaturity date of the bonds. In this case, the bonds can mature at $19.12 or $27.32. When calling upon the shares to be repaid by theshareholders, the company will have three maturity stock prices. Below $19.12 in the first call position, the company will receive apayoff of -$5.38, which is negative implying that it decreased fromthe previous period. In the second call position, Symantec willreceive a payoff of $ 2.96. These payoffs can be shown by the Excelattachments where the price is just below $19.12. They will,however, incur a cost of $19.12 when purchasing these shares. In thesecond range that is where the stock price will mature between $19.12and $27.32, the company will receive a payoff in the first callposition of $2.50 while in the second call position the company willreceive a payoff of $2.96, which is similar t the second one. Here,this range can be seen from the excel attachment where the payoffsare between $19.12 and $27.32 and just above $27.32. The will incura cost of between $ 19.12 and $27.32 when purchasing these shares. Inthe last maturity, the stock prices will be above $27.32. Here, thecompany will receive a payoff in the first call position of $2.82while in the second call position of $2.96, which is similar to theprevious ones. This can be seen from the excel attachment on theprice of $27.32. However, they will incur a cost of $27.32 whenpurchasing these shares through the investment bank. From the table,we can see the payoffs in the first call position, the second callposition, and the total payoffs at various stock price maturityranges. From the chart showing the graphs of payoffs at first callposition, at second call position and total payoffs, the company hasa bull call spread at first call position and a bear call spread atsecond call position (Symantec.com, 2015).

Stock price at maturity

Payoff at 1st call position

Payoff at 2nd call position

Total payoff

$-5.38

$2.96

$-2.42

$2.50

$2.96

$5.46

$2.82

$2.96

$5.78

References

NASDAQ.com.(2006). Market Cap of Symantec Company. Available athttp://www.nasdaq.com/SYMC/symantec-market-cap/[Accessed 7thDec. 2015].

S&ampP500. (2006). Market Cap for Symantec. Available athttp://www.S&ampP.com/SYMC/symantec-market-cap/[Accessed 7thDec. 2015].

Bloomberg.com(2015). Analyzing Stocks of Symantec Company. Available athttp://www.bloomberg.com/symantec-corporation/[Accessed 7thDec. 2015].

SymantecCorporation. (2015). Investing History. Available athttp://www.symantec.com/en/uk/[Accessed 7thDec. 2015].

Close Menu