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Hi John,
I have a doubt as to how to treat bonds which can be converted into shares on a future date? In Hav co. (specimen paper 2018) i calculated the number of shares x value per share of the combined company as the value they will get if the shares were converted, is that wrong?
In this particular question it would be wrong (although you would not lose all the marks for that part 🙂 ) because they cannot convert until 6 years from now and we do not know what the share price will be in 6 years time. Obviously the share price may well increase (which helps make this attractive to Strand’s shareholders) but if the share price were to stay as it is then they would in fact not convert.
Thanks John, also i had another doubt, not pertaining to this,
If we are an existing business and sell off a part of our business (for corporate reconstruction) and that part is sold at P/E x earnings, will that be added to find the equity value of the company? or will it be added only when there is a gain assuming what we are selling off is equal to the worth of what we are receiving? (also please explain the treatment if it was sold for cash and there was a gain and also when there is no gain)It depends what the company is doing with the proceeds of sale. As always, the value of the company will be the present value of the future earnings and so it depends on what will happen to the future earnings (they will fall by the amount of the earnings from the part sold, but they stand to increase by the investment of the sale proceeds).
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