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good day Mr Moffat Sir
in the December 2012 question 3 (a)
the calculation of the market value of convertible bond has been calculated using the $20 million book value of the bond as a denominator instead of $ 100(nominal value)
could you please advise on why was is this a case and is it applicable??
my understanding is that the nominal value($100) is always the denominator when deriving the market value of debt
again, can I be wrong to include the overdraft as debt when deriving WACC??
best regards
I am not sure which part of the answer you are referring to.
With regard to the MV of one bond with a nominal value of $100, the question gives the total MV of all the bonds, and so we need to divide by the number of bonds to get the MV of one bond.
With regard to the calculation of the WACC, we always use the total MV’s of the difference sources of finance in the calculation.
As far as the overdraft is concerned, it depends whether it is intended to be long-term or short-term. If long-term then include it, if short-term then do not include it.
In this question, if you had included it (because the question suggests it is more long-term) you would still have got full marks (even though the final WACC would have been different).
The best in the exam if there is an overdraft is to state your assumption about it.
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