Hi John,
In the acquisition proposals, proposal number (iii), why have we used the bond value as $100. When we have conversion and redemption offer, we choose the one that's higher. Then we use that to calculate the market value of the bond (which we can't find in this case as there is no kd), which i think should be used to calculate the premium paid to the shareholders. However in this case we have used $100 directly, which i am finding to be quite confusing.
Can you please shed some light on it? Thankyou!
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Hav Co (Specimen paper 2018)
7y ago#1As you have rightly said, the value of the bonds will likely be higher than the par value, but we do not have enough information to put a value on them.
This is therefore something to mention and the examiners answer does say this immediately below the calculations.
Is this the same thing that they have done in Alaska Salvage Dec 2009? The present value of the interest payments and the repayment of principal should equal the market value of the loan note. However they have equalled it to the par value of 10000 less value of the warrant. Is this treatment similar to that of Hav Co?
I refer to part (b) of Alaska salvage where they have asked for the coupon.
7y ago#3Here is issue is made at par and we are told the investors required rate of return.
Therefore the coupon must be such as to make the PV of the returns equal to the issue price.
The market value of debt is always the PV of the future receipts discounted at the investors required rate of return.
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