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$20 million loan in the form of a 6% convertible bond on which interest is payable annually.
Conversion may be undertaken on the basis of 50 equity shares for every $100 from the
beginning of Year 5 onwardssir, why in the answer we have no adjustment for the “Conversion may be undertaken on the basis of 50 equity shares for every $100 from the beginning of Year 5 onwards” although we did the calculation of the dividend figure in this question for example and shown its impact after year 4?
As far as the covenant is concerned, it only applies for four years and so the conversion at the start of the 5th year is not relevant.
sir i know this but i am asking about part b)Discuss, with supporting calculations, whether or not an MBO would be beneficial for Dofu Co and Okazu Co’s senior management team.
in this b) answer they have shown calculation of dividend after 4 years then why not the calculation for the conversion?
The question says that the annual growth rate of dividends will reduce by 60% (to 7.5%) after the 4 years.
Why it should grow at only 7.5% per year we do not know, but we have to assume that whoever came up with that expectation had taken into account the conversion and that therefore the total dividends will be $3,330,000 growing at 7.5%. (Obviously the dividend per share is affected, but this is irrelevant for the total value of the shares which is based on the total dividends).
sorry sir, i think i could not make question clear, i wasn’t asking about dividend rather i said why we did not work out for the convertible bond conversion?
“Conversion may be undertaken on the basis of 50 equity shares for every $100 from the
beginning of Year 5 onwards”It is because the question does not ask you to 🙂
It is not needed for part (b) as I explained earlier, and neither is it needed for part (c) as I have explained in my last reply.
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