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A company has issued convertible loan notes which are due to be redeemed at a 5% premium in five year’s time. The coupon rate is 8% and the current MV is $85. Alternatively, the investor can choose to convert each loan note into 20 shares in five year’s time.
The company pays tax at 30% per annum.
The company’s shares are currently worth $4 and their value is expected to grow at a rate of 7% pa.
Find the post-tax cost of the convertible debt to the company.
the above one is the question.
the answer is 11.4%
they use two different required returns( 10% and 5%)On the other hand,
I used (5% and 20%) as i’d like to get the other one being negative npv
and my IRR is 13.1 %therefore, I doubted my answer and used others ( 5% and 15%)
and IRR is 12.22%i go crazy because of this sir…
help me sir
If you have watched my free lectures (and if you remember also from the F2 lectures), then any calculation of the IRR is only an approximation because we assume linearity even though the relationship is not linear.
Therefore using different guesses will always give a different answer.That is not a problem for the exam. The examiner and markers know this and you still get the marks.
for the same question, the answer for redeemable value (RV) is Cash RV = $100 × 1.05 = 105
how do we get the $100 using MV $85?
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