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For this question 2 loans are issued .
The second loan has would be converted at begining of 5th year into shares.begining of 5 th year means end of year 4..
So this new share issue is not considered in the answer given when calculating debt equity ratio .can u pls clarifyI was thinkng in year 4 either the loan has to be converted into shares or we don’t convert them into shares.in the answer they have not converted into shares.. what is the reason that they have not converted it? In most questions that I did.. when they say begining of year 2 … We do the adjustment in year 1
And when they say end of year 2 .. we do in year 2.
So why have they not included it in year 4.. is it like they converted into shares and did comparison with 20 m and they chose to not convert?
If they do conversion the value is 10m shares has to be issued to repay the loan.
If they don’t convert they have to pay 20 m.
So the better value is converting right?
If they donyWhen we are discounting, the end of the 4th year and the start of the 5th year are effectively the same date and therefore require discounting for 4 years. However, they are 1 day apart and when calculating the gearing ratio at the end of the 4th year the conversion will not have happened – they are only entitled to convert from the start of the 5th year.
Ok so that means.. for other questions like working capital and all where they say 1 m is required at begining of year 1 .. for such questions we take in year 0. But for this loan repayment we have to think in terms of which year they will have the right to exercise it ? So it’s an exception to the rule?
No, it is not an exception to the rule.
Calculating a gearing ratio has nothing to do with discounting and at the end of the fourth year there will have been no conversion and no repayment, so the loan will still appear in the accounts at the end of the fourth year. That is financial accounting,
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