Finding Vd for Convertible debt and Preference shares in WACC

@kkhan04 said:
Hi!

Sorry if this seems like a basic question but im trying to get this calculation to a stage where I just have to plug in the figures like a reflex instead of having to read the question to figure what numbers I need to substitute into the formula.

Could you please tell me the quickest way to calculate Market Value of Debt for:

1) Convertible debt and
2) Preference shares

For example the Market Value of Debt for Redeemable Debt I have written down as follows:

(P0 ex-int/100) X Book Value = Vd

This way as soon as I see these figures in a question I can immediately start plugging them in without thinking too much and hence stockpile on valuable time.

Your comprehensive question in the WACC section only covers Equity, Redeemable debt and non tradable debt (bank loan).

Thanks a bunch!

Khurram

Hi,

To work out the market value of the debt you need to discount the future cash flows to present value, unless you are given the market value already.

In the exam I think you’d be given the market value.

For preference shares then you are given a price per share, so you just multiply by the number of shares in issue. If you aren’t given the market value then you are effectively looking at a form of irredeemable debt, so you just rearrange the formula for working out kp and make the market value the subject of the formula. So the market value is D/kp. Clearly you’d have to be given kp.

For convertible debt then it is likely that you will be given the market value. If not then there is no formula, as you have the conversion of the debt at a point in the future. Here therefore you will have to do a full discounted cash flow calculation using the post tax interest cash flows and the redemption value, being the higher of the cash and shares.

Thanks