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Hi,
Please can you let me know how this answer was arrived at?On 01.11.13 Andris issued $12 million convertible loan notes that carry a nominal interest rate of 5% per annum. The loan notes are redeemable on 31.10.16 at par or they can be converted into equity shares. A similar loan note without the conversion option would have required Andris to pay an interest rate of 8.6%.
The present value of $1 receivable at the end of each year based on discount rates of 5% and 8.6% can be taken to be:end of year 5% 8.6%
1 0.95 0.92
2 0.91 0.85
3 0.86 0.78
How would the convertible loan appear in Andris’ statement of financial position on initial recongnition? $xxxE(quity) $xxxxNCL(iability)The answer is $59,400 E $11,940,600 NCL
I am not getting the answer given using my approach to the question which is troubling.
Coupon cash flow per year is 12mm x 0.05= 600000
Value of redemption on initial recognition is 0.78 x 12mn=9360000
0.92+0.85+0.78=2.55
Liability related to coupon payments=600000 x 2.55=1530000Total liability on initial recognition is 9360000 + 1530000=10890000
Equity in this case is difference between total liability and proceeds from issue of convertible notes.
This is equal to 12000000 – 10890000=1110000
On recognition I therefore find liability equals 10890000 and equity equals 1110000 in terms of split of compound instrument.Hi
Your answer is incorrect.
This is how i would do:
12,000,000 x 5% x 2.55 (0.92+0.85+0.78) 1,530,000
12,000,000 x 0.78 (year 3) 9,360,000
debt component 10,890,000
equity component 1,110,000
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I have arrived to the same results as my colleagues above: equity component 1,110,000 debt 10,890,000
If these answers are correct could we please ask admin to amend answers in a question bank, so it does not confuse other students. If we are wrong with our answers, could someone please explain.
Thank you
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