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Dear Tutor,
I would really appreciate your help.
The question is GG issues a 3% $200,000 two-year convertible bond. The ERI is 8%. The holder has the option to convert the bond to equity shares at the rate of 10 shares with a nominal value of $1 per $100 debt rather than being repaid in cash. Transaction costs have been ignored and the financial liability will be accounted for using amortised cost.
I had worked out the compounding whereby;
The FV debt is $182,098
The FV of equity is $17,902
With overall proceeds of $200,000I struggled with the amortised cost calculation and therefore looked at the mark scheme but, I still am struggling.
Opening … Fin Cost… Cash … Closing Bal.
Year 1 … $182,098 … $14,568 … ($6000) … $190,666
Year 2 … $190,666 … $15,334 … ($6000) … $200,000I don’t understand how the $15,334 was calculated? As 6% of $190,666 is $15,253.
Also, in the mark scheme it says that the bond holder can have 20,000 $1 ordinary shares at nominal value with a share premium of $180,000. Could you please explain how these figures were found, especially the share premium part?
Thank you so much.
Hi,
I think the finance cost is incorrect, as it should be the $15,253 as you correctly state. We apply the effective rate of interest (8%) to the outstanding liability ($190,666).
The shares come from $200,000/$100 x 10 shares = 20,000 shares at $1 par, giving $20,000, and as the debt was issued at $200,000 then there would be $180,000 of share premium (200,000 – 20,000).
Hope that clears it up.
Thanks
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