Winter Quarter  2000
FINANCE 552 A    "Corporate Planning and Financing"
Feb. 17, 2000
 
BOSTON  CHICKEN  case #33
4-1/2 % Convertible Subordinated Debentures Due 2004
TAKE-AWAYS
 

1. The value of a security is the sum of its constituent pieces.  Identify all the pieces, and you can begin to value anything!  The most frequent and serious errors in valuation analysis is to ignore the hidden options.  Hidden options in this case were:
  - long call option on stock (conversion option).
  - short call option on interest rates (redemption option).
  - long put option on change-of-control (poison put).

2. The pieces are not easy to value.  That’s why we have Financial Engineers.  They do the heavy lifting.  However, you MUST be able to describe to them the structural features of the options (e.g., underlying asset, exercise price, term, volatility).
 For example, in convertible bonds, the redemption is nearly always used to force investors to convert to shares--thus it may be considered an option to shorten the life of the bond.  This reduces the value of the conversion option.  You can see how severe this may be by valuing the conversion option over 3, 4, or 5 years.  The appropriateness of Boston convert’s value is a bet on growth.

3. This stuff does not give clear simple answers. Learn this stuff because it gets us closer to truth than anything else.  It gives us a way to think about the problem that is very powerful.
 

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Click on Case Data below to go to selected case data in Excel format.  This will save you time in data entry.
We do a lot of cases this quarter that contain massive amounts of financial data.
Case Data
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To get an Excel program that calculates the value of an option based on the Black-Scholes option-pricing model click below.
B-S option pricing model in Excel format.
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 Syllabus  in Word format (Office 98)  This will download and open on your machine.
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