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Convertible debts

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Convertible debts

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • May 27, 2021 at 5:53 pm #621945
    yellowting
    Member
    • Topics: 11
    • Replies: 4
    • ☆

    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.

    May 28, 2021 at 8:15 am #621991
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51579
    • ☆☆☆☆☆

    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.

    June 2, 2021 at 10:02 pm #622848
    yellowting
    Member
    • Topics: 11
    • Replies: 4
    • ☆

    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.

    June 3, 2021 at 7:16 am #622878
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51579
    • ☆☆☆☆☆

    I do not have this mock exam, but it seems as though something is wrong.

    What I typed in my previous reply is correct 🙂

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