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The finance director of Coral Co has been asked to provide values for the company’s equity and loan
notes. Coral Co is a listed company and has the following long-term finance:
$m
Ordinary shares 7.8
7% convertible loan notes 8.0
15.8
The ordinary shares of Coral Co have a nominal value of $0.25 per share and are currently trading on an
ex dividend basis at $7.10 per share. An economic recovery has been forecast and so share prices are expected to grow by 8% per year for the foreseeable future.
The loan notes are redeemable after 6 years at their nominal value of $100 per loan note, or can be converted after 6 years into 10 ordinary shares of Coral Co per loan note. The loan notes are traded on the capital market.
The before-tax cost of debt of Coral Co is 5% and the company pays corporation tax of 20% per year.
1. What is the equity market value of Coral Co $_______m?(to two decimal place)
2. Assuming conversion, what is the market value of each loan note of Coral Co______?Hello sir May I know what is meant by conversion here in Q2 and how is it calculated thanks .
Conversion is the converting of the loan notes into shares of Coral instead of taking cash on the redemption date.
I do explain this (and the calculations involved) in my free lectures.
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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