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Hi Mike,
How should the issue costs of a convertible loan note be treated?
I’ve never seen a question with both convertible loan note and issue cost so I was wondering..
For example:
A company issued a $10 million convertible loan note that carries a nominal interest rate of 5%. This may be redeemable for cash upon maturity, or convertible into 50 equity shares for every $100 note, in 3 years time. The effective rate of interest is 8%. Issue costs of $5,000 were incurred.
Should the issue cost be taken as a charge to profit or loss?
So..do I split the debt and equity elements like this:
Figures are rounded up to ‘000s
PV of principal :
(10,000,000-5,000) x 0.79 = $7,896,000
PV of interest:
0.05 x 10,000,000 x 2.58 = $1,290,000
Total liability element = $9,186,000
Equity element = $814,000
Proceeds received = $10,000,000Carrying amount of 5% convertible loan note in SOFP would be:
(0.08*9,186,000) + 9,186,000 – 500,000
= 9,421,000Is this correct?
“0.05 x 10,000,000 x 2.58 = $1,290,000”
This should be:
0.05 x 995,000 x 2.58 = $1,283,550
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