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ACCA FM · Guided practice (Show me how)

Chapter 15: The valuation of securities – theoretical approach

Debt valuation - redeemable and convertible debt

Two companies from the notes (chapter 15). Debt is quoted per $100 nominal and values are ex int.

(a) R plc has in issue $400,000 8% debentures redeemable in 5 years' time at a premium of 10%. Investors require a return of 12% p.a. Table factors, years 1-5: at 8%, annuity 3.993, present value year 5 0.681; at 12%, annuity 3.605, present value year 5 0.567.

(b) T plc has in issue 8% debentures 2010. On maturity the debentures may be redeemed at par or converted to 20 ordinary shares in the company for every $100 nominal. The share price is currently $4.50 per share, and this is expected to grow at 7% p.a. 'Now' is the end of 2007. Investors require a return of 10%. Table factors at 10%: annuity years 1-3 2.487; present value year 3 0.751.

  1. (a) R plc: redeemable debt

    Calculate R plc's interest and redemption present values and debenture market value per $100 nominal at the valuation date.

  2. (b) T plc: convertible debt

    Calculate T plc's conversion share value at maturity in 2010, present values of interest and the maturity receipt, market value and conversion premium per $100 nominal at the end of 2007. State whether holders will convert or take cash at maturity.

Opening this exercise…