【正确答案】Average historical share price growth = 100 x ((10·90/9·15)^1/3– 1) = 6% per year Future share price after⁷years = 10·90 x 1·06 Conversion value of each loan note = 16·39 x 8 = $131·12 The investor is faced with the choice of redeeming the loan notes at their nominal value of $100 or converting them into shares worth $131·12. The rational choice is to maximise wealth by taking the conversion option. Market value of each loan note = (8 x 5·033) + (131·12 x 0·547) = 40·26 + 71·72 = $111·98

【正确答案】The average price/earnings ratio (P/E ratio) of listed companies similar to Par Co has been recently reported to be 12 times and the most recent earnings per share (EPS) of Par Co is 62 cents per share. The share price calculated using the P/E ratio method is therefore $7·44 (12 x 62/100). One problem with using the P/E ratio valuation method relates to the selection of a suitable P/E ratio. The P/E ratio used here is an average P/E ratio of similar companies and Par Co is clearly not an average company, as evidenced by its year-end shareprice being $10·90 per share, some 47% more than the calculated value of $7·44. The business risk and financial risk of Par Co will not be exactly the same as the business risk and financial risk of the similar companies, for example, because of diversification of business operations and differing capital structures. Par Co may be a market leader or a rising star compared to similar companies. The P/E ratio method is more suited to valuing the shares of unlisted companies, rather than listed companies such as Par Co. If the stock exchange on which its shares are traded is efficient, which is likely as it is a large stock exchange, the share price of Par Co will be a fair reflection of its value and its prospects. As a listed company, Par Co would in fact contribute to the average P/E ratio for its business sector, used in valuing similar unlisted companies. Looking at the P/E ratio of Par Co, it can be seen that this is not constant, but has increased each year for four years, from 14·3 times in 2011 to 17·6 times in 2014. This raises questions about using a P/E ratio based on historical information as a way of valuing future activity. Ideally, the P/E ratio method should use forecast maintainable earnings, but the calculated value of $7·44 has used the historical EPS of 2014. As this was the lowest EPS over the four years, forecasting future maintainable earnings may be a problem