Corning Harvard Case Solution & Analysis

Corning Case Study Analysis

Apart from the signaling effect, there were several dilution effectsthat existedwhen the company decided to go on with raising of the equity from the general public. In this case, it might be observed that the general public and market wouldget affected negatively by the share issue because they will think that the sharing process is overvalued, which would lead to a subsequent decrease in the market share price, which would ultimately reduce the total capitalization of the company.In addition to all the concerning factors for raising the equity from the general public, last but not the least factor is the excessive time consumption than the time consumed by the other financing methods.

The main reason for raising the debt for the company is to increase the liquidity threat for the company, along with an increase in the weighted average cost of the capital for the company due to an increase in the company’s overall risk and debt to equity ratio.

Theoretical Value of Corning Preferred Convertible

The theoretical price value of the Corning Incorporated mandatory preferred convertible is 3. 14 dollars, which is shown in the Exhibit 1 of the document. Below are some points regarding the equity finance raising for the Corning Incorporated:

  1. It is still an equity offering.
  2. Investors might do dynamic hedge.
  3. An effect from equity offering signal and hedge fund shorting could combine to have a significant negative price impact on the common stock price.

Proposed Convertible Preferred Stock

  1. A long position in 31.746 shares of Corning common share.
  2. A short position in 31.746 call options with a strike price of 3.15 dollars.
  3. A long position in 26.021 call options with a strike price of 3.843 dollars.
  4. Use Black Scholes formula to price the value of the options.

Proceedings with Offering

Analysis (Security):

  1. Securities are attractively priced for investors, at 100 dollars.
  2. “Sweeter” for investors, achieving Corning’s goal for raising capital.
  3. Could convert immediately and capture the 2.39 dollars premium.
  4. Or could hedge dynamically to capture the 6.80 dollars premium.
  5. Hedge fund probably would not want Corning stock exposure.

Financial Impact:

  1. The negative market reaction was very huge.
  2. The prospectus was released on July 29, after the stock closed at 3.15 dollars.
  3. The stock fell to 2.47 dollars the next day and 1.60 dollars two days later when the deal closed.
  4. Under the new terms, upon conversion Corning would have to issue double the number of shares it had planned, a total of a 20 percent extra dilution of the existing shareholders.

Main Reason to Proceed is Profits:

  1. Most shares bought by hedge funds.
  2. Many were immediately converted.
  3. High costs of dynamichedging was the reason whythey chose an immediate conversion.
  4. Corning’s shares rebounded over the next several years, selling for 7.18 dollars a year later, and 19.05 dollars 3 years later.

This offering is indeed very cheap for the investors.................................


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