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Corning, Inc.: Zero-Coupon Convertible Debentures

Autor:   •  June 22, 2019  •  Case Study  •  2,810 Words (12 Pages)  •  54 Views

Page 1 of 12


Case Summary:

Key assumptions

Effective yield


Risk free (15 years)


Volatility (call option)


Volatility (put option)


Value of straight bond

 $                 746,151,050

Value of call option

 $              1,240,893,805

Value of redemption option

  $               (534,092,482)

Value of put option

 $                 471,462,280

Value of the bond

 $              1,924,414,652

Bond Price

 $              2,003,192,100



Case Context

Corning, Inc. is one of the leading corporations in the fields of telecommunications, advanced materials, and information display. All three operating segments give Corning an average of $450 million per year.  Industry analysts expect that the annual demand growth rate for business across all the aforementioned three segments will grow even higher through 2000 and even the years beyond that.

The company’s management is confident of Corning’s potential to expand its business and attain even higher profitability. Thus, in November 2000, Corning announced that it would issue $2.7 billion zero-coupon convertible bonds priced at $741.92 per $1000 principal amount. In addition, it would conduct a separate public offering of 30 million common shares at $71.25 per share. This would generate around $4.8 billion for the company, which would be used to acquire Optical Technologies, USA, an optical components and devices business. This strategy will increase total capitalization of the company to $14 billion from $10 billion, and change the debt-to-capitalization to 29% from 21%. In addition, the debt to capitalization will reach 41% from 26%.

Despite the positive outlook of Corning regarding the telecommunications industry, there some a little concern over a potential oversupply of optical fibers in the market, which would affect the prices of fibers, and cause revenues and demand to decrease for Corning. This would impact the company negatively, as the telecommunications segment accounted for 70% of the whole company’s revenues. Nonetheless, management thought that this concern was trivial, and would not materialize. Other concerns Corning faces are the slowing down of the business in the United States, technological change, and the wariness of investors to capital-intensive companies, such as Corning.


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