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Sources of Finance: Convertible Debt
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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…
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…
I am sorry – it is an error.
The discounting should be done at 10%.
I will re-record the lecture.
Thanks a lot sir…May you arrange a lecture regarding Business valuations as the content of theory is a bit tough,,,
i am mainly talking about PE ratio…
I will record a lecture, but I am afraid that I am unlikely to have the time to do it before the June exams.
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%.
i have the same query…
Why I can not download this Video?
You can only watch lectures on line, they are not downloadable.
Because shares have a cash value.
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)?
@yogeeta75, I think that the word ‘debt’ is confusing you. In this context, debt is ‘debt borrowing’. The company has borrowed money.
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)?
@yogeeta75, The word ‘debt’ is confusing you. In this context, debt is ‘get borrowing’. The company has borrowed money.
@johnmoffat, sorry – ‘get borrowing’ should read ‘debt borrowing’!
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.
what abt part b
@m23ahmuda, right, i was also looking fwd for an explanation for part b pls. Thanks!
@johnmoffat
Could you pls also include the explanation for part b of the excercise?
@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!
@johnmoffat, ok, i got it now; i had mixed sth up; thanks for the reply