Question 5: Evaluate the Put-Warrant/Convertible Bond proposal. Does it solve Intel’s capital structure dilemma? What arguments might be made in favor of it?

Intel’s capital structure dilemma was that it was holding too much cash on hand. Eventually, there were three available strategies or alternatives that Intel could undertake in terms of cash disbursement policies. First, it could continue or expand its market-repurchase program. Secondly, Intel could declare dividends to its shareholders on existing stocks. The last strategy is to put together a package of two unique securities: 1) A distribution of a two-year put warrant to its existing shareholders. 2) A distribution of 10-year convertible subordinated debentures to new
Also, cash holdings would remain high due to: 1) no obligation to purchase shares from shareholders since put warrants would not be exercised, 2) no 5% coupon payments since the bonds would be converted to shares as shareholders desire capital gains. The converse (falling Intel stock prices) would result in a positive alteration of Intel’s capital structure by reducing cash on hand, increasing debt, and decreasing equity.

Calculations of the debt-equity ratio (using long-term debt) and cash ratio in different scenarios (using 1991 figures):

a. (363 + 1000)/4558 = 29.9%
b. (1000 + 2277)/(1228 + 0.05 x 1000) = 256.4%
c. 363/(4558 + 13.3 x 75) = 6.53%
d. (1000 + 2277)/1228 = 266.9%
e. (363 + 1000)/(4558 - 1000) = 38.3%
f. (2277 + 1000 – 1000)/(1228 + 0.05 x 1000) = 178.2%

1. Shareholders will not exercise put warrants and debt holders will convert bonds into shares.
2. Shareholders will exercise put warrants and debt holders will not convert bonds into shares.

From the above computations, we can observe that the best scenario for Intel would be the case where stock prices drop below $50. In this case, Intel can improve on its leverage by using more debt to finance its operations, and