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Hi sir,
I have a question on calculating the cost of convertible debt.
Far Co has 10 million ordinary shares in issue, which have an ex-dividend share price of $9.00 per share.
A dividend of 45 cents per share has just been paid. Dividends are expected to grow at 5% a year for the foreseeable future.
Far Co has in issue 8% convertible bonds redeemable in six years’ time with a total nominal value of $4 million. The market value of each $100 bond is $103. The bonds can be converted to 12 shares.
Far Co pays corporation tax at a rate of 30%.
What is the cost of Far Co’s convertible debt to the nearest whole number?
Answer: $9 x (1 + 0.05)^5 x 12 = 138
I don’t understand why it should be ^5 instead of ^6 as the question stated that the bonds will be redeemed in 6 yrs time.
Thanks for your help.
On what you have typed, the answer should have taken it to the power 6 and not to the power 5.
However, that would not be the cost of debt anyway!! That would simply be the conversion amount in 6 years time.
If this is either a past exam question or a question in the BPP Revision Kit, then tell me which question and so I can check the wording of it myself.
Sorry for the late reply!
The question was from a complimentary mock paper that I signed up for. I signed up via a link, which was provided by ACCA Singapore. The paper is from First Intuition.
But the wording of the question given in the paper is exactly how I typed it above. So I am not sure if that was a typo by them.
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