As shown in the previous Instantblog, the PPS implied by the current CB can be described with the used of just two variables:
- Expected Trading Price of the New Bond (as % of Face Value)
- Trading Price of Current $540m CB (as % of Face Value)
If the $540m CB is currently trading at 30% … and you expect the new issued bond after the reorganization to be trading at 50% ….
… then the Value of the Equity owned by all Current shareholders after the Reorganization is currently Valued (by the Bond Market) at $3.92m
… based on the 4.9m common shares outstanding, it translated to a PPS of approximately $0.80
… Since USU is currently trading at $3.50 … if follows that the PPS is overvalued by approximately 337% (with respect to the price Implied by the Bond Market)!
- In this case, you are better off … buying the CB bond … instead of the common shares.