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Hi,
Struggling with a specific question and was wondering if i could get some guidance….
on 31 December 2005 a company issued 1 million $10 5% convertible loan notes and these can be redeemed on 31 December 2008 in the form of cash or equity shares. Similar debt without a conversion option carry interest rates of 8%. The proceeds from the bond issue are currently recorded in loans….
I am expected to make adjustments to SOFP 31 December 2005 and i am struggling with what the adjustments should be, could somebody please help?
My understanding is that you need to calculate the debt element of the instrument first, and then the equity element is the residual amount. To calculate the debt element, you need to work out the present value of the future cash flows. This might be wrong, but here’s my workings, to the nearest ‘000.
2006 interest – $10,500 * 5% = 525 / 1.08 = 486.111
2007 interest = 525 / 1.08^2 = 450.103
2008 interest = 525 / 1.08^3 = 416.762
2008 repayment of principal = 10,500 / 1.08^3 = 8,335.239Total debt = 9,688.215
Equity therefore = 10,500 – 9,688.215 = 811.785
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