1. Profile photo of Zablon says

    Thanks Jef, thanks Zohaib too. I had recognised that the d.f for 10% used in the answers was wrong. Almost raised the querry until I saw your comments. In my computation I used the correct ones for 10%, This is a sign that I am learning. Thanks all.

    • Profile photo of John Moffat says

      Do you mean lecture part (b) – in which case there is; or do you mean that the lecture doesn’t contain part (b) of the answer?

      If the latter then you are correct. However there is of course an answer in the course notes as always.

    • Profile photo of John Moffat says

      There is no problem with the lectures.
      The problem is almost certainly the internet connection at your end. If you go to the support page you will find advice on what to do – the link is just below the lecture.

    • Profile photo of John Moffat says

      $90% means that the market value is $90 for every $100 nominal.

      In the calculation of cost of debt, we need the ex int market value (the MV immediately after interest has been paid). In the question it says that the MV is $90 but that interest is about to be paid (so it is cum int). The interest about to be paid is $12, and so the ex int MV is $90 – $12 = $78

  2. Profile photo of tandi says

    What if a debenture holder is old and wants to retire from business activities. Ie. he just wants his cash and out? Or would you still take the shares if higher than cash and re-sell instead of taking cash which is lower?

    • Profile photo of Mahoysam says

      I suppose anyone would take the shares, because it is not like he is gonna be stuck with shares forever, he can directly sell them on the stock exchange, so he will have his cash just like he wanted plus some extra!

  3. Profile photo of Zohaib says

    Sir, kindly elaborate it a bit, as we have to discount the receipts by the Investor’s required rate of return which in the specific question is 10% but the calculations has been done by using the coupon rate which is 8%. the annuity factor for 10% for 3 years is 2.487 but in the question it is 2.577 and Discount factor varies too…

  4. Profile photo of elsie2009 says

    Hi I have worked through part b and am slightly confused by the answer to part ii, the required cost of capital is 10% I had assumed that the df factor would be 10%.

    The answer uses the 8% df rates but states 10%, is this because the conversion premium is the current mv of the shares less the current coversion value, so the current df is 8% the desired df is 10%.

  5. avatar says

    from the companies point of view – is this a source of finance?how?

    so at the end of the term the company does not repay the debentures but instead takes shares in the company(where the debenture was taken)?

      • Profile photo of John Moffat says

        @annchen, I am puzzled which part of the answer you are not clear about.

        in part (b)(i), as always, the market value of debt is the present value of expected receipts discounted at the investors required rate of return. Having calculated the expected share price, it is clear that the investors will expect to convert in 3 years time.

        Part (b)(ii) is explained perfectly in the answer and I cannot say anything extra to what is there!

Leave a Reply