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A 9% redeemable loan note in ATV Co is due to mature in 3 years’ time at a premium of 15%, or convertible into 25 ordinary shares at that point. The current share price is $4, expected to grow at 10% per annum. ATV pays corporation tax at a rate of 30%.
What is the current market value of the loan note if loan note holders require a 10% return?A $108.75
B $115.63
C $102.03
D $122.34
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Every component of the provided solution is crystal clear to me apart from the area where they calculated the conversion value. The formula they used ( P0(1+g)R ) is kind of confusing as it seems to differ from the one provided in the formula sheet. Please guide me through just this one step as beyond that I can easily route to the correct answer (D)The formula for this is not given on the formula sheet.
The share price will grow at 10% per year for 3 years, so it will grow to $4 x (1.1^3).
There are 25 shares, so the conversion value will be 25 x $4 x (1.1^3).
I explain this in my free lecture on convertible debt. (The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.)
Oh I get it it now! We just have to apply the growth rate to current share price.
Thanks a lot 🙂
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