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An 8% $30 million convertible loan note was issued on 1 April 20X5 at par. Interest is payable in arrears on 31 March each year. The loan note is redeemable at par on 31 March 20X8 or convertible into equity shares at the option of the loan note holders on the basis of 30 shares for each $100 of loan. A similar instrument without the conversion option would have an interest rate of 10% per annum.
The present values of $1 receivable at the end of each year based on discount rates of 8% and 10% are:
8% 10%
End of year 1 0.93 0.91
2 0.86 0.83
3 0.79 0.75
Cumulative 2.58 2.49What amount will be credited to equity on 1 April 20X5 in respect of this financial instrument?
The answer is $1,524,000. I cannot understand the model answer. Can you explain it in a simpler form please? – Thanks
The format of the question changed
8%
End of Yr 1 0.93
End of Yr 2 0.86
End of Yr 3 0.79
Cumulative 2.5810%
End of Yr 1 0.91
End of Yr 2 0.83
End of Yr 3 0.75
Cumulative 2.49You need to calculate the present value of servicing this debt
So find the ‘today’ value of 8% * $30 million in 1 year’s time
Then again in 2 years’ time
And again in 3 years’ time
And finally the present value of paying $30 million in 3 years’ time
All these amounts payable are discounted at 8%
Add up those 4 amounts and deduct the total from $30 million and the difference is the equity element of this mixed / compound instrument
Did you understand that? If not, post again
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