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Sir when the option to convert to shares is for example after 7 years whereas the redemption at nominal value is after 8 years. In this case
If the cost of debt is mentioned in the question i. Understand that we can compare the conversion value with the( redemption value +interest)by discounting the redemption value +interest for one year using the cost of debt.
But what if the question do not states the cost of debt and instead mentions the current market value…in this case there will be no cost of debt for discounting…A company has 5% loan notes in issue which are redeemable at their nominal value of $100 per loan note in eight years’ time. Alternatively, each loan note is convertible after seven years into 11 ordinary shares. The company’s ordinary shares are currently trading at $6.50 per share and this is expected to increase by 6% per year. The current market value of the loan notes is $88.70 per loan note. The corporate tax rate is 30%.
Required:
Calculate the cost to the company of the convertible loan notes.
Like in this question the cost of debt is asked….and the conversion and redemption are in different time period…how will we compare the conversion and redemption option?
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