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convertible loan question

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › convertible loan question

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by MikeLittle.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • May 20, 2017 at 12:46 pm #387111
    Nicola
    Member
    • Topics: 16
    • Replies: 6
    • ☆

    Hi I am trying to answer part of a question on converted loan notes,
    I get a bit mixed up with these the questions It states Downing issued 300,000 $100 5% convertible loan notes 1st April 2015 these are converted to equity shares of 25 for each 100$ Loan note on 31st March 2018 or at par for cash on the same date. equivalent loan without the conversion rights would require int at 8%
    end of year 1 it has £1500 x 0.93 (8%)
    I am struggling with £1500 outflow figure and the calculations, is it something to do with the 25 shares etc, then $1500 x 0.86 then 31.500 x 0.79 I kind of understand the present value of the outflow by x by 0.93 to get the present value costs. can you tell me where the 1500 figure came from and the 31500 please.
    Where can I get some better understanding of convertible loans and the concept of it please? P S I was exempt from F3 so wondering if I am struggling with some of the fundamentals of F7 and would it be useful to go over some F3 lectures?
    Thanks Nicola

    May 20, 2017 at 2:19 pm #387116
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23311
    • ☆☆☆☆☆

    300,000 notes worth $100 each = $30,000,000 worth of loan notes

    5% x $30,000,000 = $1,500,000

    So the present value of the real costs of servicing this loan are:

    $1,500,000 x 1/1.08 = $1,388,888 ($1,500 x .9259)
    $1,500,000 x 1/1.08 x 1/1.08 = $1,286,008 ($1,500 x .8573)
    $1,500,000 x 1/1.08 x 1/1.08 x 1/1.08 = $1,190,748 ($1,500 x .7938)
    $30,000,000 x 1/1.08 x 1/1.08 x 1/1.08 = $23,814,967 ($30,000 x .7938)

    Does that explain it?

    Chapter 23 in the F2 course notes covers discounted cash flows … so that could help to strengthen your understanding of the concepts involved

    As for fundamentals of accounting … other than time spent there would be no other loss were you to listen to John’s lectures on F3 and follow through the free course notes as he’s lecturing. Probably a good idea

    OK?

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