J'07/2 : Wellmay

Hi Cara

I can’t find the question on the Internet but I can point you in the direction of my own recorded answer to Wellmay and that may well (sorry) help you!

I put “F7 Wellmay” into my search box and the first one on the list is my recorded answer to Wellmay

Try that and then, if you’re still stuck, post again but you’ll need to type out note (v) for me

This is a “mixed instrument” comprising a debt element and an equity element

Step 1 is to calculate the present value (pv) of the debt obligation and, from that, we can find the equity element

Pv of the debt element is the interest that has to be paid over the next 4 years, discounted to today at the discount rate of 10%

Add to that the pv of the principle amount of $400,000 and deduct the derived total figure from the $600,000 face value of the instrument – that then gives you the equity element of $40,000 and a debt element of $560,000

Take that $560,000, add on the interest at 10%, deduct the interest paid by the company ($600,000 x 8%) and you arrive at $568,000 at the end of the first year

For your own enjoyment, follow those steps through for the next 3 years and arrive at the figure (almost, subject to roundings) of $600,000 at the end of the fourth year

Ok?