Sources of Finance: Convertible Debt

1. 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.

• 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.

2. says

Is there a technical why the lectures are always freezing.I use them to study F9 and are very good but they keeping stopping. Are your a where of the problem? Thanks

• 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.

3. says

what does \$90% means for debenture.. in practice question example no 12.
how value come to 78.

kssoni

• 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

• says

No – not in the calculation of a project NPV (because it is accounted for in the calculation of the weighted average cost of capital )

4. 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?

• 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!

5. says

Thanks a lot sir for your response, I will wait for the lecture and pray that you get time for it :)…As these lectures are very useful…

6. 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…

• says

I am sorry – it is an error.
The discounting should be done at 10%.

I will re-record the lecture.

• says

Thanks a lot sir…May you arrange a lecture regarding Business valuations as the content of theory is a bit tough,,,

• says

i am mainly talking about PE ratio…

• says

I will record a lecture, but I am afraid that I am unlikely to have the time to do it before the June exams.

7. 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%.

8. says

its a convertible DEBT – How come they have the option of taking cash or shares and not considering that as debt( repay at the end of term)?

• says

@yogeeta75, I think that the word ‘debt’ is confusing you. In this context, debt is ‘debt borrowing’. The company has borrowed money.

9. 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)?

• says

@yogeeta75, The word ‘debt’ is confusing you. In this context, debt is ‘get borrowing’. The company has borrowed money.

• says

@johnmoffat, sorry – ‘get borrowing’ should read ‘debt borrowing’!

10. says

As the lecture says, part (b) is left until later because it needs knowledge that has not yet been covered.
However you can see the answer to it at the back of the course notes.

• says

@m23ahmuda, right, i was also looking fwd for an explanation for part b pls. Thanks!

• says

@johnmoffat
Could you pls also include the explanation for part b of the excercise?

• 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!

• says

@johnmoffat, ok, i got it now; i had mixed sth up; thanks for the reply