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.
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Hello John, please help..
8% debentures valuing $5m.
Nom Val 100
Mv 105
Conversion is likely of 45 shares for every 100$ debentures in 5 years time.
RV 110
Share price in 5 years time is 4$
Cost of capital 15%.
Req: estimate the current mv of the deventures assuming conversion takes place, using npv value methods.Problem: shouldn’t we take the cash out flow of 105$ mv in year 0 while calculating this? .If not , why?
You must in future ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other.
It is impossible for me to give you a complete answer without seeing the whole question and it doesn’t seem to be in the current edition of the BPP Revision Kit (if it is a part exam question then give me the date of the exam and I will find it).
However there would be no logic at all in subtracting 105!
The market value of debentures is the present value of future receipts (the interest receipts and the value on conversion). It is not the NPV of anything.Have you watched me free lectures on the valuation of securities? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exams well.
Thanks John, I get it now. & in future I will use Ask The Tutor Forum. Anyways, is there any forum where we can share pictures of the questions and ask u or any other tutor for help? This would be very easy and quick.
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