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Under the topic of business valuations, how do we deal with the following areas:
Valuation of convertible debt and calculation of conversion premium
I’ve never heard of these, are example of these in the OT F9 notes?
Yes, they are covered in the OpenTuition notes. There is an example on page 71.
The market value of the debt is (as always) the present value of the future expected receipts. The interest receipts are obvious, but to get the expected receipt on the redemption date you need to decide what investors will currently expect to do. (i.e. what is higher – taking cash, or taking shares based on what they currently expect that the share price is likely to be on the redemption date). Whichever is the higher is their expected receipt. Then you carry on as normal.
The conversion premium can be defined in several different ways, but for the exam it is the difference between the market value of the bond (as calculated above), and the value of converting now at the current share price.
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