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Company has convertible loan notes in issue that may be redeemed at a 7% premium to par value in 5years. The coupon is 8% and the current market value is $103.
Alternatively the loan notes may be converted at that date into 18 ordinary shares.
The current value of the shares was $2 six years ago and is $4 today and is expected to grow at the same rate in the future.What is the cost of the convertible debt?”
So you have to decide if they will convert to shares or cash?
Take the no of shares * share price with est growth
Growth is div now/div older to the the power of (1/ no of years of growth) -1
Then you look at what redemption at a premium is which is par or now * 1 + premium
Whichever is the highest is the redemption
Then you do IRR to find the the cost of the convertible debt
MV (103) at to so this is multiplied by one
Int 8 (usually adj for tax) at an annuity factor as this is every year until redemption
Redemption at highest figure at a present value figure as this is a one offThen find what % gives npv of zero using two rates one hopefully giving you a + npv and one –
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