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Hi i really need help with this question. Please explain it to me.
Convert Co issues a convertible loan that pays interest of 2% per annum in arrears. The market rate is 8%, being the interest rate for an equivalent debt without the conversion option. The loan of $5 million is repayable in full after three years or convertible to equity. Discount factors are as follows:
years Discount Factors
1 0.926
2 0.857
3 0.794Required: Split the loan between debt and equity at inception and calculate the finance charge for each year until conversion/ redemption.
This question is from the Kaplan study text Chapter 9 Illustration 3. For some reason i cant seem to figure it out. Please explain this question to me.
Thank you so much.Hi,
We need to use split accounting to correctly account for the convertible loan. The accounting for it is covered in chapter 11 of the class notes and in the videos. If you read through the class notes and watch the videos, try to attempt the question and if you are still struggling let me know but let me know specifically what you are struggling with then I can help further.
To help you get started you need to look at discounting the annual coupon interest (using the 2%) and the principal ($5m) to present value.
Thanks
Thank you so much. I actually watched the lecture on this and it was super helpful as well.
Hie
Can you help me on this questionNust ltd issue 10 000 $100 convertible bonds for $900 000 and will have a convertion option to 500 000 shares of $1.50 each at the end of 3 years.Transaction cost are $150 000 and coupon rate is 5%.Similar instruments without convertion option have a market value of 11%.Prepare the extract of the financial statements for the 3 years.Assume they are converted at the option of the issue
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